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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal year ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from
to
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Commission File Number 1-9138
FIRST CENTRAL FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
New York 11-2648222
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
266 Merrick Road, Lynbrook, New York 11563
(Address of principal executives office) (Zip Code)
Registrant's telephone number, including area code: (516) 593-7070
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
$.10 Par Value Common Stock American Stock Exchange
9% Convertible Subordinated Debentures due 2000 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. X Yes ___ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K. [ ]
At March 29, 1996, 5,988,608 shares of the Registrant's Common Stock were
outstanding and the aggregate market value (based upon the last reported sale of
the Common Stock on the American Stock Exchange on said date) of such shares
held by non-affiliates of the Registrant was approximately $29,304,173 (for
purposes of calculating the preceding amount only, all directors and executive
officers of the Registrant are assumed to be affiliates).
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10 (except for the information with respect to
Registrant's executive officers which is set forth at Item 4A in Part I of this
Report under the caption "Executive Officers of the Registrant"), 11, 12 and 13
of Part III of this Report is incorporated herein by reference to Registrant's
definitive Proxy Statement to be filed on or before May 1, 1996 pursuant to
Regulation 14A.
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FIRST CENTRAL FINANCIAL CORPORATION
1995 Form 10-K Annual Report
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS ................................................................. 1
ITEM 2. PROPERTIES ................................................................. 13
ITEM 3. LEGAL PROCEEDINGS........................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS .................................................................. 13
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ...................................................... 15
ITEM 6. SELECTED FINANCIAL DATA .................................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 25
Independent Auditor's Report................................................ 35
Consolidated Balance Sheets at December 31, 1995
and 1994 ................................................................ 36
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994, and 1993 ........................................ 37
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1995, 1994, and 1993......................... 38
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994, and 1993................................... 39
Notes to Consolidated Financial Statements.................................. 40
Supplementary Data -- Quarterly Financial Data
(Unaudited)............................................................... 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES...................................... 25
i
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT ............................................................... 25
ITEM 11. EXECUTIVE COMPENSATION ..................................................... 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................................ 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ............................................................. 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K ...................................................... 26
ii
PART I
ITEM 1. BUSINESS.
General
First Central Financial Corporation (referred to herein as
"First Central" or the "Registrant"), a corporation incorporated under the
laws of the State of New York on May 18 1983, is the parent company of First
Central Insurance Company ("First Central Insurance"), and Mercury Adjustment
Bureau, Inc. ("Mercury"). First Central Insurance writes multiple lines of
property and casualty insurance including Commercial Multiple Peril, Workers'
Compensation, General Liability, Automobile Liability and Physical Damage,
Products Liability, Fire, Allied Lines, Boiler and Machinery, Glass, Burglary
and Theft, and Inland Marine. Mercury is a licensed insurance adjuster and
represents the interests of a number of property and casualty insurers and
self-insurers who conduct insurance business in the State of New York. Unless
otherwise indicated, references to First Central include its subsidiaries.
In June 1995, First Central Insurance was rated A- (Excellent) by
A.M. Best & Co., Inc. ("Best"), one of the predominant services engaged in the
industry-wide rating of insurers and reinsurers. Best's ratings are based on an
analysis of the financial condition and operating performance of an insurance
company. The ratings are classified in fifteen levels: A++ and A+ (Superior), A
and A- (Excellent), B++ and B+ (Very Good), B and B- (Adequate), C++ and C+
(Fair), C and C- (Marginal), D (Very Vulnerable), E (Under State Supervision), F
(In Liquidation). According to Best, the ratings constitute Best's opinion of
the relative financial strength of insurance companies in comparison to industry
performance and the ability of such companies to discharge their
responsibilities to policyholders, and are based upon twelve factors, i.e.,
profitability, leverage/capitalization, liquidity, spread of risk, quality and
appropriateness of the reinsurance program, quality and diversification of
assets, adequacy of policy/loss reserves, adequacy of surplus, capital
structure, management's experience and objectives, market presence and
policyholder's confidence. Best does not rate securities issued by insurers and
insurance holding companies. The ratings assigned by Best are not indicative of
any determination by Best concerning the relative value or performance of the
rated company's securities.
According to Best's 1995 Insurance Reports for Property and
Casualty Insurers, the A- (Excellent) rating received by First Central Insurance
is assigned to those insurers who have demonstrated excellent overall
performance when compared to the standards established by the A. M. Best
Company. A- companies have a strong ability to meet their policyholder
obligations over a long period of time.
Lines of Business
The lines of insurance written by First Central Insurance are:
Commercial Multiple Peril: This line represented 53.4% of total
direct premiums written in 1995 (50.1% in 1994) and 50.7% of net premiums earned
(46.0% in 1994). Losses incurred represented 70.2% of premiums earned (43.1% in
1994) for this line of business.
Workers' Compensation: This line represented 12.5% of total
direct premiums written in 1995 (16.1% in 1994) and 13.8% of net premiums earned
(18.5% in 1994). Losses incurred represented 50.9% of premiums earned (41.6% in
1994) for this line of business.
General Liability: This line represented 23.2% of total direct
premiums written in 1995 (21.1% in 1994) and 23.5% of net premiums earned (21.4%
in 1994). Losses incurred represented 62.0% of premiums earned (47.6% in 1994)
for this line of business.
1
Automobile Liability: This line represented 7.7% of total direct
premiums written in 1995 (8.5% in 1994) and 8.5% of net premiums earned (9.7% in
1994). Losses incurred represented 80.7% of premiums earned (77.8% in 1994) for
this line of business.
Automobile Physical Damage: This line represented 2.2% of total
direct premiums written in 1995 (3.2% in 1994) and 2.6% of net premiums earned
(3.7% in 1994). Losses incurred represented 47.7% of premiums earned (50.4% in
1994) for this line of business.
Other Lines: Products liability, fire, allied lines, boiler and
machinery, glass, burglary and theft, and inland marine were the other lines
written in 1995. They represented 1.0% of total direct premiums written (1.0% in
1994) and 0.9% of net premiums earned (0.7% in 1994). Losses incurred
represented 26.6% of premiums earned (22.8% in 1994) for these lines of
business.
In lines written as a percentage of direct premiums written,
i.e., increases in commercial multiple peril, general liability and decreases in
workers' compensation, automobile liability, and automobile physical damage,
First Central Insurance did not effect any material changes in the location of
business, the geographic mix thereof or the types of risks insured. the
geographic mix thereof or the types of risks insured.
Insurance Risk Rating
First Central Insurance's minimum premium rates for commercial
multiple peril, workers' compensation, general liability, automobile liability,
automobile physical damage, products liability, fire, allied lines, glass,
burglary and theft, and inland marine insurance heretofore have been established
in accordance with rates recommended by the Insurance Services Office ("ISO"), a
bureau engaged in the nationwide publication of premium rates recommended for
use by property and casualty insurers. Management believes that by strictly
adhering to a policy of charging minimum rates which did not fall below ISO
recommendations, it maximized First Central Insurance's potential for achieving
profits from underwriting operations. ISO has, however, begun to phase out the
publication of such rates and instead has begun to publish certain other data
that may assist insurance companies in establishing rates. Management intends to
continue to set its rates based, in part, on ISO rate recommendations for as
long as such recommendations are disseminated, and thereafter, to set its rates
based on data provided by ISO.
Premiums Written, Reinsurance Ceded and Premiums Earned
The following table sets forth direct premiums written,
reinsurance ceded, net premiums written, decrease (increase) in unearned
premiums, and net premiums earned by First Central Insurance for five years
ended December 31, 1995. Direct premiums written are the total premiums written
less cancellations. Reinsurance ceded is the premiums written applicable to
reinsured risks which First Central Insurance has ceded to other insurers. Net
premiums written are the direct premiums written less all premiums ceded. Net
premiums earned are the net premiums written attributable to those portions of
the policies expiring within the accounting period. The decrease (increase) in
unearned premiums represents the deficiency (excess) of net premiums written
over net premiums earned during the accounting period.
2
Years Ended December 31
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1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
Direct premiums written $ 72,294 $ 65,593 $ 53,023 $ 39,189 $ 31,437
Reinsurance ceded (21,726) (10,163) (6,531) (4,151) (2,941)
-------- -------- -------- -------- --------
Net premiums written 50,568 55,430 46,492 35,038 28,496
Decrease (increase) in unearned
premiums 2,466 (5,369) (3,678) (5,582) (424)
-------- -------- -------- -------- --------
Net premiums earned $ 53,034 $ 50,061 $ 42,814 $ 29,456 $ 28,072
======== ======== ======== ======== ========
Premiums Written, Premiums Earned and Losses Experienced
One means of measuring the underwriting experience of a property
and casualty insurer is by its "combined ratio." This ratio is the sum of (1)
the ratio of losses incurred to net premiums earned (the "loss ratio"), (2) the
ratio of loss adjustment expenses incurred to net premiums earned (the "loss
adjustment expense ratio"), (3) the ratio of underwriting expenses incurred to
net premiums written (the "underwriting expense ratio"). The Insurance industry
attains the combined ratio of an insurance company based on ("SAP") Statutory
Accounting Principles, the combined ratio for First Central Insurance for the
year ended 1995 is 110.6% based on SAP. The combined ratio reflects the
underwriting experience of an insurer but does not reflect loss of premium
balances, federal or state income taxes nor income from investments. The actual
profitability of property and casualty insurers also depends on net income from
investments. The Insurance industry considers a combined ratio under 100% to
indicate underwriting profitability and a combined ratio over 100% to indicate
an underwriting loss. This consideration is based on industry data and not
accounting principles since a combined ratio under 100% can mathematically show
an underwriting loss due to the fact that the underwriting expense ratio is
based on net written premiums and the loss and loss adjustment expense ratios
are based on net earned premiums.
The following table shows for First Central Insurance, on the
basis of Generally Accepted Accounting Principles ("GAAP"), net premiums
written, net premiums earned, losses incurred and the loss ratio for each of the
five years ended December 31, 1995, by line of business written. The table also
includes, on a GAAP basis, loss ratio, loss adjustment expense ratio,
underwriting expense ratio and combined ratio information as reported on a
consolidated basis by First Central.
3
Years Ended December 31
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1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
Commercial Multiple Peril:
Net Premiums Written ....................... $ 24,973 $ 26,405 $ 23,176 $ 17,526 $ 13,460
Net Premiums Earned ........................ 26,870 23,024 21,202 14,329 12,634
Losses Incurred ............................ 18,873 9,927 7,075 5,960 5,187
Loss Ratio ................................. 70.2 43.1 33.4 41.6 41.1
Workers' Compensation:
Net Premiums Written ....................... $ 6,843 $ 9,457 $ 8,461 $ 6,549 $ 4,469
Net Premiums Earned ........................ 7,299 9,263 8,273 5,202 4,302
Losses Incurred ............................ 3,712 3,857 4,809 2,908 1,550
Loss Ratio ................................. 50.9 41.6 58.1 55.9 36.0
General Liability:
Net Premiums Written ....................... $ 12,879 $ 12,467 $ 7,045 $ 3,693 $ 4,794
Net Premiums Earned ........................ 12,469 10,733 5,727 3,611 4,883
Losses Incurred ............................ 7,726 5,109 1,825 831 933
Loss Ratio ................................. 62.0 47.6 31.9 23.0 19.1
Automobile Liability:
Net Premiums Written ....................... $ 4,242 $ 4,973 $ 5,357 $ 4,788 $ 3,456
Net Premiums Earned ........................ 4,487 4,838 5,114 3,943 3,563
Losses Incurred ............................ 3,619 3,762 4,493 3,093 2,393
Loss Ratio ................................. 80.7 77.8 87.9 78.4 67.2
Automobile Physical Damage:
Net Premiums Written ....................... $ 1,092 $ 1,677 $ 2,111 $ 2,148 $ 2,013
Net Premiums Earned ........................ 1,355 1,857 2,123 2,066 2,205
Losses Incurred ............................ 647 936 1,411 1,153 1,645
Loss Ratio ................................. 47.7 50.4 66.5 55.8 74.6
All Categories (including
above categories and all
others):
Net Premiums Written ....................... $ 50,568 $ 55,430 $ 46,492 $ 35,038 $ 28,496
Net Premiums Earned ........................ 53,034 50,061 42,814 29,456 28,072
Losses Incurred ............................ 34,724 23,514 20,061 14,130 11,925
Loss Ratio ................................. 65.5 47.0 46.9 48.0 42.5
Loss Adjustment Expenses
Incurred .................................. $ 7,337 $ 6,110 $ 5,714 $ 2,680 $ 3,869
Loss Adjustment Expenses
Ratio ..................................... 13.8 12.2 13.3 9.1 13.8
Expenses Incurred .......................... $ 17,129 $ 17,283 $ 16,352 $ 13,215 $ 11,953
Expenses Ratio ............................. 33.9 31.2 35.2 37.7 41.9
GAAP Ratio ................................. 113.2 90.4 95.4 94.8 98.2
Operating (Loss) Income .................... $ (6,156) $ 3,154 $ 687 $ (569) $ 324
Relationship Between Net Premiums and Surplus
Insurance industry practices generally suggest that property and
casualty insurance companies maintain net premiums written at a level no more
than 300% of "surplus to policyholders" as calculated in accordance with
Statutory Accounting Principles. See "Business - Regulation." For the five years
ended December 31, 1995, First Central Insurance's percentages of net premiums
written to statutory surplus, based upon the annual statements filed by it with
the Insurance Department of the State of New York (the "Insurance Department"),
were as follows:
Years Ended December 31
--------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
192% 272% 211% 194% 161%
4
Loss and Loss Adjustment Expense Reserves
First Central Insurance maintains reserves for unpaid losses and unpaid
loss adjustment expenses for all lines of insurance written. These reserves are
intended to cover the probable ultimate cost of settling all losses incurred and
unpaid, including those not yet reported. First Central Insurance establishes
reserves on a case by case basis by evaluating reported claims based upon the
type of risk involved, knowledge of the circumstances surrounding each claim,
the severity of injury or damage and the potential for ultimate exposure, the
policy provisions relating to the type of loss, and by estimating unreported
claims on the basis of statistical information with respect to the probable
number and nature of claims arising from occurrences which have not yet been
reported. Reserves are monitored using a variety of techniques for analyzing
actual claim frequency data. In addition to case basis reserves, loss and loss
adjustment expense reserves also include Incurred-but-not-reported ("IBNR")
reserves. IBNR reserves are reserves for insured losses that have occurred but
have not been reported to the insurance company.
Loss reserves are estimates only at a given point in time of what the
insurer expects to pay on losses, based on facts and circumstances then known,
and it is possible that the ultimate liability may exceed or be less than such
estimates. The estimates are not precise inasmuch as, among other things, they
are based on predictions of future events, estimates of future trends in claim
severity and frequency and other variable factors. During the loss settlement
period, which may be as long as several years, it often becomes necessary to
refine and adjust the estimates of liability on a claim either upward or
downward, and even then the ultimate liability may exceed or be less than the
estimates. Inflationary pressures and escalations of repair costs, medical
expenses and the sizes of injury awards have necessitated periodic upward
adjustments in reserves over the loss settlement periods by most casualty and
property insurers.
Loss adjustment expense reserves to cover the ultimate cost of
investigating all losses and defending lawsuits arising from such losses are
established each year based on historical data such as the ratio of loss
expenses paid to claims paid over the preceding years and on the basis of
currently available information. Adjustments required to be made in the amount
of outstanding loss reserves each year may require corresponding changes in the
loss adjustment expense reserves.
The following factors are taken into consideration in determining
current year adjustments to loss and loss adjustment expense reserves recorded
in prior years; (1) the accumulation of individual case estimates for losses
reported prior to the close of the accounting period; (2) estimates for
unreported losses based on past experience modified for current trends; and (3)
estimates of expenses for investigating and adjusting claims based upon past
experience. First Central Insurance makes implicit provisions for the effects of
inflation and for the combined effects of a number of factors (including
inflation) which may cause future changes in severities. It does not, however,
employ any significant reserving assumptions in determining its loss reserves
other than the foregoing developed facts. The Insurance Department requires,
pursuant to Statutory Accounting Principles, that loss ratios in each of the
three most recent years be not less than 60% of its annual net earned premiums
for general liability line of business, (65% in the case of workers'
compensation line of business), and to establish, to the extent necessary,
reserves which conform to such assumptions ("Excess Statutory Reserves"). That
assumption is only employed by First Central Insurance with respect to the
filing of such annual statements. It is not utilized in connection with the
development of loss reserves employed in the actual operation of First Central
Insurance's business nor are such Excess Statutory Reserves required to be
established under GAAP.
The year to year estimation and re-estimation of loss and loss
adjustment expense reserve requirement is an inexact science. To the extent that
future changes in known data do not take place precisely in accordance with an
insurer's historically developed loss reserving assumptions, such reserves, when
5
viewed as of a particular point in time, most likely will be either deficient,
i.e., lower than the amount needed to cover known loss and loss adjustment
expenses, or redundant, i.e., greater than the amount required with respect
thereto.
The following table presents the development of First Central
Insurance's reserves for losses and loss adjustment expenses (net of reinsurance
receivables) of its underwriting activities for the years ended December 31,
1985 through December 31, 1995:
Years Ended December 31
-----------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Net Reserves for
Losses and Loss
Adjustment
Expenses(1).......... $4,643 $8,910 $14,897 $18,067 $21,632 $22,702 $25,874 $28,703 $38,074 $48,928 $67,095
Reserves Re-estimated
As of:
One Year Later........ 4,695 9,105 15,109 17,685 20,461 23,172 26,985 32,902 43,957 61,923
Two Years Later....... 4,828 8,722 14,106 16,078 20,214 23,705 29,831 36,980 52,224
Three Years Later..... 4,623 8,481 12,694 15,719 19,081 24,914 29,860 42,351
Four Years Later...... 4,872 8,207 12,751 14,839 20,367 26,253 32,785
Five Years Later...... 4,691 8,094 12,270 15,289 20,388 27,098
Six Years Later....... 4,520 7,733 12,475 14,831 20,739
Seven Years Later..... 4,376 7,731 11,892 15,008
Eight Years Later..... 4,302 7,272 11,841
Nine Years Later...... 4,058 7,143
Ten Years Later....... 3,968
Cumulative Redundancy
(Deficiency).......... 675 1,767 3,056 3,059 893 (4,396) (6,911) (13,648) (14,150) (12,995)
Cumulative Amount of
Liability Paid:
One Year Later........ 1,301 1,501 3,078 3,870 6,653 7,496 8,494 10,259 13,806 37,472
Two Years Later....... 1,873 2,730 4,950 7,225 10,452 12,310 14,565 18,785 27,693
Three Years Later..... 2,540 4,084 7,212 9,747 13,121 16,927 19,816 28,340
Four Years Later...... 3,180 5,426 8,713 11,567 15,913 20,167 25,568
Five Years Later...... 3,819 6,205 9,661 12,899 17,522 22,963
Six Years Later....... 4,149 6,667 10,597 13,196 18,559
Seven Years Later..... 4,351 7,134 10,654 13,662
Eight Years Later..... 4,495 7,052 10,888
Nine Years Later...... 4,360 7,122
Ten Years Later....... 4,360
(1) Includes reserves for loss adjustment expenses with respect to estimates
of losses sustained and reported in the subject year, but not reported until a
subsequent year net of reinsurance recoverables.
Management is unaware of any unusual circumstances that might distort the
data presented in the foregoing table.
6
The amounts of First Central Insurance's reserves for losses and
loss adjustment expenses for the year ended December 31, 1995, determined on the
basis of GAAP, were less than the amounts of such reserves determined in
accordance with Statutory Accounting Principles ("SAP"). Such variance resulted
from the following fundamental differences in the manner in which reserves are
determined under GAAP and SAP: (a) First Central Insurance recorded as a
separate line item a $24,272 "Special Reserve" on its 1995 SAP based financial
statements (said amount was classified as, and included in, the reserves for
losses and loss adjustment disclosed in First Central's GAAP based financial
statements); (b) as a result of adjustments for intercompany eliminations
required in connection with the preparation of First Central's GAAP based
financial statements, the GAAP basis reserves for expected loss adjustment
expenses payable to Mercury were reduced by $258,023; and (c) conforming to the
Insurance Department statutory accounting principles, First Central Insurance
did not have an "Excess Statutory Reserve" in 1995.
First Central Insurance does not discount its loss and loss
adjustment expense reserves for financial reporting purposes.
Reconciliation of Loss Reserves
First Central Insurance's aggregate reserves for insurance losses
and loss adjustment expenses as of December 31, 1995, 1994 and 1993 and the
changes made therein during such years were as follows:
December 31
-----------------------------------------------------
1995 1994 1993*
---- ---- ----
(Dollars in Thousands)
Reserves at Beginning of Year:
Losses ................................ $ 42,048 $ 31,832 $ 24,054
Loss Adjustment Expenses 6,880 6,242 4,649
----------- ------------ ------------
48,928 38,074 28,703
Increase in Loss and Loss
Adjustment Expense Reserves
Insured Events of Current Year........ 29,066 23,741 21,575
Insured Events of prior Years......... 12,995 5,883 4,199
----------- ------------ ------------
42,061 29,624 25,774
----------- ------------ ------------
Payments of Losses and Loss
Adjustment Expenses Insured Events
of Current Year....................... 5,057 4,964 6,144
Insured Events of Prior Years.......... 18,837 13,806 10,259
----------- ------------ ------------
23,894 18,770 16,403
----------- ------------ ------------
Reserves at End of Year................ $ 67,095 $ 48,928 $ 38,074
=========== ============ ============
* Restated to conform to the 1995 and 1994 presentation
The reserves at the end of 1995, 1994 and 1993 are net of
reinsurance recoverables of $19,541, $24,589, and $6,732, respectively.
Management believes that First Central Insurance's reserves are
adequate to cover the ultimate net cost of losses and loss adjustment expenses
on reported and unreported claims with respect to its existing business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Loss and Loss Adjustment Expense Reserves."
7
First Central Insurance is a member of certain "assigned risk"
reinsurance pools, mainly for automobile insurance, under which all insurers
doing business in a particular state provide coverage for insureds who could not
otherwise secure insurance in the open market. Participation in such pools (or
direct writing of insurance for assigned risks) is a condition to writing the
applicable lines of insurance in New York. Pool participants issue insurance for
assigned risks on a pro rata basis which compares the volume of their voluntary
insurance written in a state to all voluntary insurance written therein. Such
assigned risk writings are made as and when requests are made for the same by
the Insurance Department. First Central Insurance became a pool participant in
1981. First Central Insurance wrote approximately $1,411,000, $412,000 and
$330,000 of assigned risk business in 1995, 1994 and 1993, respectively.
Geographical Distribution
First Central Insurance is licensed to conduct insurance business
in Connecticut, Delaware, Maryland, New York and Pennsylvania. However, all of
the business previously conducted by First Central Insurance and the income
derived therefrom, except for approximately $183,000, $300,000 and $41,000 of
premiums written in Pennsylvania and Connecticut in 1995, 1994 and 1993,
respectively, has resulted from policies issued in New York.
Reinsurance Ceded
A reinsurance transaction takes place when an insurance company
transfers (cedes) a portion or all of its exposure on insurance directly written
by it to another insurer which assumes the exposure in return for a portion or
all of the premium. Insurance is ceded principally (a) to reduce net liability
on individual risks, (b) to protect against catastrophic losses and (c) to
maintain desired ratios of net premiums written to statutory surplus. Most
reinsurance is written under contracts (treaties) in which the coverage is
either on a "quota share" basis, where the reinsurer shares proportionately in
premiums and losses, or on an "excess" basis where only losses above a fixed
point (retention) are reinsured. First Central Insurance is a party to
reinsurance contracts under which certain types of policies are automatically
reinsured without the need for further approval of the reinsurers which have
agreed to cover the types of risks involved ("treaty" reinsurance). First
Central Insurance also is a party from time to time to reinsurance contracts
which relate to an individual policy or type of risk and require the specific
agreement of the reinsurer as to each risk with respect to which reinsurance is
assumed ("facultative" reinsurance).
The ceding of reinsurance does not discharge the original insurer
from its primary liability to the policyholder and the ceding company is
required to pay the loss if the assuming company fails to meet its obligations
under the reinsurance agreement. The practice of insurers, however, subject to
certain statutory limitations and as permitted by regulatory authorities, is to
account for reinsured risks to the extent of the reinsurance ceded as though
they were not risks for which the original insurer is liable. While this
practice is acceptable for regulatory purposes, it is not acceptable under
generally accepted accounting principles due to FASB Statement No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." Statement No. 113, which First Central was required to adopt on
January 1, 1993, requires reporting of estimated reinsurance receivables arising
from reinsurance contracts and amounts paid to the reinsurer relating to the
unexpired portion of reinsured contracts (prepaid reinsurance premiums)
separately as assets.
8
The following table shows the amount of reinsurance premiums
ceded by First Central Insurance for five years ended December 31, 1995:
The 113.8% increase in reinsurance premiums in 1995 when compared
to 1994 was a result of an change in accounting for reinsurance premiums whereby
the premiums are based on a percentage of written premiums rather than a
percentage of earned premiums as was calculated in 1994, 1993, 1992 and 1991.
Years Ended December 31
- --------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------- ----------- ---------- ---------- ----------
$21,726,000 $10,163,000 $6,531,000 $4,151,000 $2,941,000
Since July, 1988, National Reinsurance Corp. ("Nat Re") has
reinsured a portion of every risk underwritten by First Central Insurance.
During the time periods of July 1, 1988 to June 30, 1989, and from July 1, 1989
to May 31, 1990, First Central Insurance's retention per loss for all lines of
property and casualty coverage was fixed at $100,000 and $150,000, respectively.
Pursuant to a reinsurance treaty entered into between First Central Insurance
and Nat Re effective June 1, 1990, with endorsement No. 1 dated July 1, 1991
through endorsement No. 6 dated January 1, 1994, First Central Insurance's
retention is fixed at $200,000 per loss for all lines of property and casualty
insurance. As of January 1, 1994, a new agreement went into effect and the
retention remained fixed at $200,000. Under the terms of said treaty, Nat Re
will assume up to $800,000 of any loss in excess of First Central Insurance's
retention on any one loss not exceeding $1,000,000. In addition to the
$1,000,000 limit, as of January 1, 1994, First Central Insurance, pursuant to an
excess agreement with Nat Re is reinsured for an additional $1,000,000 (for a
total of $2,000,000) for workers compensation coverage only and as of January 1,
1992, First Central Insurance, pursuant to an automatic facultative arrangement
with Munich American Reinsurance Company ("Munich American"), is reinsured for
an additional $1,500,000 (for a total of $2,500,000) on a pro rata basis for
property coverage only. In addition to Nat Re and Munich American, First Central
Insurance has an automatic facultative arrangement with North American Re (North
American), for an additional $2,000,000 (for a total of $4,500,000) as of
January 1, 1993, on a pro rata basis for property coverage only. Additionally,
there are other reinsurance companies with which First Central Insurance has
facultative arrangements on an individual risk basis.
First Central Insurance has not effected any significant
additions to or changes in its reinsurance programs other than as hereinabove
described.
Investments and Investment Portfolio
As is customary in the insurance industry, an insurer seeks to
derive income from underwriting and investments, with most of its net income
attributable to investment income.
New York law regulates the types, quality and concentration of
investments that may be made by First Central Insurance. First Central Insurance
is generally permitted to invest, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred stocks and common stocks, real estate mortgages and real estate.
First Central Insurance has not heretofore realized any unusually
large gains, nor has it suffered any unusually large losses with respect to the
disposition of its investments. As of January 1, 1994, the Company adopted FASB
Statement No. 115 which requires that management classify its investments in
debt and marketable equity securities. In accordance with FASB Statement No.
115, except for securities classified as "held to maturity," unrealized gains
and losses may, depending on their
9
character, affect the Company's statement of income or shareholders' equity.
Realized and unrealized gains and losses on securities classified as "held for
trading" are recognized in the Company's income statement. Unrealized gains and
losses on securities classified as "available for sale" are reported, net of the
related deferred tax effect, as increases or decreases in shareholders' equity
and realized gains and losses on such securities are included in earnings.
Insurance industry practices oblige First Central Insurance to maintain net
premiums written at a level of no more than 300% of "surplus to policyholders".
See "Business - Regulation." Accordingly, First Central Insurance's ability to
write additional premiums is subject to increases and decreases in such surplus
which is significantly dependent upon investment results. First Central
Insurance's investments in fixed income securities are of investment grade
quality and their value is affected by the fluctuation of interest rates. The
value of First Central Insurance's equity investments are affected by conditions
prevailing in equity markets from time to time.
The following tables summarize First Central's investments and
the results therefore during the five years ended December 31, 1995:
December 31
-----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
(Dollars in Thousands)
Fixed Maturities:
U.S. Government Notes and
Securities $ 33,670 33.4 $ 9,486 11.6 $ 9,196 12.4 $ 5,649 9.6 $ 5,307 10.2
Municipal Bonds.................. 30,397 30.2 19,926 24.3 19,756 26.7 21,158 36.1 21,179 40.6
Corporate Bonds.................. 4,293 4.3 10,419 12.7 14,068 19.1 10,036 17.1 4,080 7.8
Foreign Bonds.................... 696 0.7 681 0.8 631 .9 581 1.0 531 1.0
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Fixed Maturities........ 69,056 68.6 40,512 49.4 43,651 59.1 37,424 63.8 31,097 59.6
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Equity Securities:
Adjustable Rate Preferred........ 6,633 6.6 16,990 20.7 15,743 21.3 7,309 12.5 804 1.6
Common Stock, including Limited
Partnerships and Mutual Funds... 22,072 21.9 15,812 19.3 9,732 13.2 9,103 15.5 11,156 21.4
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Equity Securities....... 28,705 28.5 32,802 40.0 25,475 34.5 16,412 28.0 11,960 23.0
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Short-Term Investments:
Money Market Accounts,
Certificates of Deposit and
U.S. Treasury Bills............ 2,918 2.9 8,759 10.6 4,753 6.4 4,808 8.2 9,056 17.4
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Investments.................. $100,679 100.0 $82,073 100.0 $73,879 100.0 $58,644 100.0 $52,112 100.0
======== ===== ======= ===== ======= ===== ======= ===== ======= =====
December 31
------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ----- ---- ---- ----
(Dollars in Thousands)
Average investments (1)............ $91,376 $77,976 $66,262 $55,378 $49,729
Change in unrealized (losses) gains
on equity investments............. 6,590 (5,877) (983) (188) 672
Net investment income (2).......... 4,905 4,784 3,979 3,417 3,164
Realized gains (losses)............ 1,100 951 2,114 1,192 1,134
Net investment income as a
percentage of total average
investments........................ 5.4% 6.1% 6.0% 6.2% 6.3%
Realized gains (losses) as a
percentage of total ave.
investments........................ 1.2% 1.2% 3.2% 2.2% 2.3%
(1) Investments based on average of beginning and ending period balances.
(2) After deduction of investment expenses and before federal income taxes.
10
Regulation
First Central Insurance is subject to regulation and supervision
by the Connecticut, Delaware, Maryland, New York and Pennsylvania Insurance
Departments and by the insurance commissioners or similar officials in any other
jurisdiction in which it will be licensed to transact business. Such regulation
and supervision includes, among other things, requirements of capital and
surplus, solvency standards, granting and revoking licenses to transact business
and the licensing of agents, approval of policy forms and rates, restrictions on
the amount of risks assumed, deposits of securities, methods of computing
reserves and the types and concentration of investment permitted. First Central
Insurance is required to file detailed annual and other reports on its financial
condition, affairs and management with such regulatory agencies and is subject
to periodic examinations.
First Central Insurance is subject to regulation under the
insurance holding company statutes of Connecticut, Delaware, Maryland, New York,
and Pennsylvania. These regulations generally require subsidiaries of insurance
holding companies and insurers which are subsidiaries of holding companies to
register and file certain reports, and require prior regulatory agency approval
of changes in control of an insurer and of intercorporate transfers of assets
within the holding company structure. In many states, including New York, where
First Central Insurance is incorporated, "control" is presumed to exist if 10%
or more of the voting securities of the insurer are owned or controlled by a
party, although the regulatory authority may find that "control" in fact does or
does not exist where a person either owns or controls a lesser or greater amount
of securities. The New York Insurance Law provides that no corporation or other
person, except an insurer already licensed by the Insurance Department, may
acquire control of First Central, unless it has given notice to First Central
Insurance and obtained prior written approval of the Insurance Department for
such acquisition.
Most states require insurers licensed by their respective
insurance regulatory authorities to participate in insurance guaranty
associations. These associations assess insurance companies a percentage of
premiums written for the relevant line of insurance to fund claims of
policyholders of insolvent insurance companies. First Central Insurance is
required to pay to the New York Property/Casualty Insurance Security Fund (the
"Guaranty Fund") one half of one percent of its net direct written premiums on
policies insuring property or risks located in New York. However, no
contributions are required to be made whenever the net value of the Guaranty
Fund is at least $150,000,000. In 1995, 1994 and 1993 First Central Insurance
contributed $0, $0, and $17,659, respectively, to the Guaranty Fund. As of
December 31, 1992 the Guaranty Fund's net value exceeded $150,000,000 therefore,
no contributions were required after February 15, 1993.
As of December 31, 1995 in accordance with regulatory guidelines,
a $300,000 par value U.S. Treasury Note, was held on deposit by the NYS
Insurance Department.
Investigation and Settlement of Claims
Upon the reporting of claims by policyholders First Central
Insurance first verifies coverage and then the claim is investigated by
adjusters retained by First Central Insurance. These adjusters estimate the
initial reserves for the claim and issue a report. The report is then reviewed
by First Central Insurance's Claims Department. First Central Insurance's policy
is to attempt to settle all claims as quickly as possible. All claims
settlements are reviewed and approved by the Vice President of Claims. If the
claim cannot be settled and results in litigation, First Central Insurance may
retain outside legal counsel. Legal defense law firms are assigned on the basis
of venue and severity of the case. Presently, First Central Insurance uses
approximately thirty law firms. Since the inception of First Central Insurance's
business operations, the law firm of Simon, Drabkin & Margulies ("Simon,
Drabkin") has performed subrogation and defense services required by First
Central Insurance. Martin J. Simon, President and Director of First Central and
Ralph Drabkin, a Director of First Central, are senior partners
11
of Simon, Drabkin. During each of the years ended December 31, 1995 and 1994,
approximately 23.1% and 28.4%, respectively, of all litigation assigned by the
Company to legal defense firms were defended by Simon, Drabkin.
In September 1988, First Central acquired Mercury, a claim
adjustment and investigation company. Mercury represents the interests of First
Central Insurance and a number of other casualty insurers and self insurers.
First Central Insurance employs the services of other adjusters and will
continue to employ the services of other adjusters in addition to Mercury.
During each of the years ended December 31, 1995 and 1994, approximately 79.1%
and 94.1%, respectively, of all claim adjustments and investigations were
assigned to Mercury.
No changes have been effected in First Central Insurance's claim
payment patterns due to portfolio loss transfers, structured settlements or any
other transactions or circumstances.
Marketing
First Central Insurance's programs are marketed solely through
its approximately 50 general agents. Management believes that by adhering to the
agency concept of marketing, First Central Insurance has been able to limit its
marketing costs to a predictable percentage of premium receipts which is only
incurred when a policy is actually issued. First Central Insurance pays
competitive commission rates to its general agents and has entered into written
general agency agreements with them.
During each of the years ended December 31, 1995 and 1994,
approximately 12.7% and 12.5% respectively, of all insurance written by First
Central Insurance was sold through Simon General Agency, Inc. ("Simon General")
a licensed general insurance agency, the stock of which is owned by Joan
Dollinger and Audrey Goodman (the respective wives of Joel Dollinger and Allan
Goodman, Vice Presidents and Directors of First Central) and Sheryle Harwood,
who are Mr. Simon's three daughters.
First Central Insurance believes that its relations with its
agents are satisfactory. The loss of Simon General could have a materially
adverse effect on the business of First Central Insurance.
Competition
The insurance industry is highly competitive. First Central
Insurance is subject to intense competition from insurers offering insurance
programs similar to those offered by First Central Insurance, from insurers
offering other types of insurance programs and from other segments of the
financial services industry. To compete effectively, First Central Insurance has
adopted ISO Rates (see "Business- Insurance Risk Rating"), and markets its
insurance programs solely through its approximately 50 general agents. Many of
First Central Insurance's competitors have well established agency systems or
numerous sales agents which afford them a competitive advantage over smaller
companies possessing limited resources, such as First Central Insurance. At
present, First Central Insurance is a minor factor in the insurance industry and
is more vulnerable than its larger competitors due to its relatively small
capital and surplus.
Employees
At December 31, 1995, First Central Insurance employed
approximately 116 people, of whom six were executive personnel. At December 31,
1995, First Central had 6 employees, all of whom were executive personnel. At
December 31, 1995, Mercury employed approximately 27 people. Management believes
that its relationship with its employees is satisfactory.
12
ITEM 2. PROPERTIES.
On January 17, 1995, First Central Insurance purchased its home
office building, located at 266 Merrick Road, Lynbrook, New York, (the
"Building") for $4,000,000 in cash. The Building consists of approximately
30,000 square feet of office space and 2,000 square feet of retail space. The
approval to acquire real estate required by the State of New York Insurance
Department was obtained on December 27, 1994. The Company has assumed the leases
of the tenants of the Building. Management believes that the Building is
suitable for First Central's purposes for the foreseeable future.
Approximately 9,600 square feet of office and retail space is
leased to eight unaffiliated tenants who paid $204,690 in rent during 1995.
First Central Insurance subleased 3,900 square feet of its leased
office space to Simon General under a sublease agreement that expired November
30, 1995. During 1995, Simon General paid $88,323 in rent to First Central
Insurance. Effective December 1, 1995 Simon General entered into a lease for
3,900 square feet, which provides for an annual rent of $78,000. Simon General's
rent under the lease is comparable to that paid by other tenants who occupy the
building.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which First
Central, First Central Insurance or Mercury is a party or of which any of their
property is the subject, except for claims arising in the ordinary course of
business of First Central Insurance. First Central Insurance has established
reserves with respect to such claims in accordance with Insurance Department
regulations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during
the fourth quarter of 1995.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning all
executive officers of First Central. Executive officers are elected by the Board
of Directors to serve at the pleasure of the Board.
Name Age Position
- ---- --- --------
Martin J. Simon 76 Chairman of the Board and President
Joel I. Dollinger 53 Executive Vice President
Harvey Mass 59 Senior Vice President
Joan M. Locascio 38 Treasurer, Vice President, and CFO
Raymond F. Brancaccio 68 Vice President and Secretary
Allan R. Goodman 48 Vice President
Martin J. Simon has served as the President and Chairman of the
Board of Directors of First Central Insurance since August 1980, and as
President and Chairman of the Board of Directors of First Central since June
1983. From 1943 through 1967, Mr. Simon practiced law as an individual
practitioner. Since 1968 he has been the senior partner of Simon, Drabkin.
Between 1947 and 1955, Mr. Simon co-owned and operated a New York licensed
insurance agency. Since 1955, Mr. Simon has
13
solely owned and operated several insurance agencies licensed by the State of
New York. Included among them are: Simon General Agency, Inc., a property and
casualty insurance agency (see "Marketing" above); Simon Commercial Corp.,
another property and casualty agency which is the largest shareholder of First
Central and wrote business for First Central Insurance prior to 1994; Simon
Agency International, Ltd., an excess and surplus lines insurance agency; and
Simon Life Agency, Inc., a life insurance agency. Mr. Simon has also served on
the Board of Directors of Continental Bank since approximately November 1983 and
on the Board of Directors of Winston Resources Inc. since March 18, 1992. Mr.
Simon is Allan R. Goodman's and Joel I. Dollinger's father-in-law.
Joel I. Dollinger became a director of First Central Insurance in
August 1980, and of First Central in June 1983. On October 11, 1985 he became a
Vice President of First Central and First Central Insurance. On June 8, 1988 he
was elected Executive Vice President of First Central. From 1975 to December 31,
1991, he served as Vice President of Simon General Agency. Mr. Dollinger is Mr.
Simon's son-in-law, and Mr. Goodman's brother-in-law.
Harvey Mass has been a director of First Central Insurance since
August 1980 and a director of First Central since June, 1983. On October 11,
1985 he was elected as a Vice President of both First Central and First Central
Insurance. From 1973 to December 31, 1991, Mr. Mass served as Vice President and
production manager of Simon General Agency, Inc.
Joan M. Locascio served as both First Central Insurance's and
First Central's Controller from October 1986 to November 1993. On June 12, 1990
she was elected Treasurer and a Director of First Central and First Central
Insurance. On April 10, 1992 she became Vice President of First Central and
First Central Insurance. Mrs. Locascio oversees the financial accounting
operations of First Central and is First Central's Chief Financial Officer.
Raymond F. Brancaccio has been a director of First Central
Insurance since June 1989. He was elected Vice President of First Central on
March 18, 1992, and of First Central Insurance in January 1988. Mr. Brancaccio
has been Secretary of First Central Insurance since June 1990 and of First
Central since February 1992. Mr. Brancaccio oversees First Central Insurance's
Underwriting and Processing sections.
Allan R. Goodman became a director of First Central Insurance in
August 1980 and a Director of First Central in June 1983. He served as Treasurer
of First Central from June 1983 through October 1985. He served as Vice
President of First Central and Secretary of First Central Insurance from 1985 to
1991 and as Vice President of both First Central and First Central Insurance
since 1993. Mr. Goodman oversees First Central Insurance's Claims Department.
Mr. Goodman is Mr. Simon's son- in-law, and Mr. Dollinger's brother-in-law.
14
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
First Central's common stock, par value, $.10 per share ("Common
Stock"), is listed on the American Stock Exchange. The high and low sales prices
of the Common Stock, presented on a quarterly basis during 1995 and 1994, are
shown below.
High Low
---- ---
1995
First Quarter............................ 7 3/8 5 3/4
Second Quarter........................... 7 3/4 6 5/8
Third Quarter............................ 7 3/4 6 1/2
Fourth Quarter........................... 7 6 1/8
1994
First Quarter............................ 7 3/4 5 5/8
Second Quarter........................... 7 1/4 5 1/2
Third Quarter............................ 7 1/4 6 1/2
Fourth Quarter........................... 7 1/4 6 1/4
As of December 31, 1995, there were approximately 284 holders of
record of First Central's Common Stock.
Dividends
As the principal asset of First Central, First Central Insurance
provides the only material source for the payment of dividends by First Central.
Under the insurance laws of the State of New York, cash dividends to
shareholders may be declared or distributed by First Central Insurance only from
earned surplus. In addition, among other statutory restrictions, dividends are
limited in any twelve month period to the lesser of ten percent of
policyholders' surplus as shown in the insurer's last annual statement on file
with the Insurance Department, or one hundred percent of adjusted net investment
income during such twelve month period, unless the Superintendent authorizes a
greater dividend. First Central Insurance's total Surplus to Policyholders as of
December 31, 1995 amounted to $26,350,816 (computed on the basis of SAP).
However, by reason of the foregoing statutory restrictions, $2,635,082 thereof
is available for distribution as a dividend by First Central Insurance to First
Central.
Any payment of dividends by First Central Insurance to First
Central would result in a reduction in its capacity to write new premiums, since
the volume of insurance that can be written is determined by the available
surplus of First Central Insurance. Any payment of dividends by First Central
Insurance may be further limited to maintain the acceptable industry standard
relationship of net premiums written not to exceed three times surplus.
First Central declared dividends of $0.12, $0.105 and $0.10 per
share respectively in 1995, 1994 and 1993. The declaration and payment of
dividends in the future will depend, subject to the discretion of the Board of
Directors, upon First Central's and First Central Insurance's earnings,
financial condition, business needs, capital and surplus requirements,
government regulations, and other relevant factors.
15
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in
conjunction with the consolidated financial statements of First Central and
related footnotes appearing elsewhere herein and Management's Discussion and
Analysis of Financial Condition and Results of Operations. The selected
financial data, with the exception of the ratio of earnings to fixed charges for
each of the five years in the period ended December 31, 1995, are derived from
First Central's audited consolidated financial statements for such years.
Income Statement Data
Years Ended December 31
--------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands, except per share data)
Net Premiums Earned ............... $ 53,034 $ 50,061 $ 42,814 $ 29,456 $ 28,072
Net Investment Income ............. 4,905 4,784 3,979 3,417 3,164
Realized Gains .................... 1,100 951 2,114 1,192 1,134
Total Premiums and Other
Revenues ......................... 59,897 56,265 49,447 34,622 32,722
Losses ............................ 34,724 23,514 20,061 14,130 11,925
Loss Adjustment Expenses .......... 7,337 6,110 5,714 2,680 3,869
Interest Expense .................. 607 642 827 1,053 1,148
Total Expenses .................... 60,493 48,605 43,496 31,178 30,163
Income (Loss) Before Income Taxes . (595) 7,660 5,952 3,444 2,559
Income Taxes ...................... (956) 1,944 1,450 512 452
Income Before Extraordinary Item .. 361 5,716 4,502 2,932 2,107
Extraordinary Item ................ 0 0 0 0 419
Net Income ........................ $ 361 $ 5,716 $ 4,502 $ 2,932 $ 2,526
Per Share Data:
Primary:
Income Before Extraordinary Item. $ 0.06 $ 0.97 $ 0.80 $ 0.53 $ 0.38
Extraordinary Item .............. $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.08
-------- -------- -------- -------- --------
Net Income ...................... $ 0.06 $ 0.97 $ 0.80 $ 0.53 $ 0.46
======== ======== ======== ======== ========
Fully Diluted:
Income Before Extraordinary Item. $ 0.06 $ 0.90 $ 0.75 $ 0.53 $ 0.38
Extraordinary Item .............. $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.08
-------- -------- -------- -------- --------
Net Income ...................... $ 0.06 $ 0.90 $ 0.75 $ 0.53 $ 0.46
======== ======== ======== ======== ========
Cash Dividends Declared .......... $ 0.12 $ 0.105 $ 0.10 $ 0.10 $ 0.10
======== ======== ======== ======== ========
Ratio of Earnings to Fixed
Charges ......................... 0.2:1 9.3:1 5.9:1 3.4:1 2.9:1
======== ======== ======== ======== ========
16
Balance Sheet Data
December 31
----------------------------------------------------------------
1995 1994 1993 1992 * 1991 *
---- ---- ---- ---- ----
(Dollars in Thousands, except per share data)
ASSETS:
Fixed Maturities................... $ 69,056 $ 40,512 $ 43,651 $37,424 $ 31,097
Equity Securities.................. 28,705 32,802 25,475 16,412 11,960
Short-Term Investments............. 2,918 8,759 4,753 4,808 9,056
----------- ----------- ----------- --------- ----------
Total Investments.................. 100,679 82,073 73,879 58,644 52,113
Other Assets....................... 67,781 59,656 34,043 28,375 23,080
----------- ----------- ----------- --------- ----------
Total Assets....................... $ 168,460 $ 141,729 $ 107,922 $87,019 $ 75,193
=========== =========== =========== ========= ==========
POLICY LIABILITIES & ACCRUALS:
Losses............................. $ 78,887 $ 66,500 $ 38,392 $27,865 $ 23,139
Loss Adjustment Expenses........... 7,749 7,017 6,414 4,715 4,865
Unearned Premium................... 36,296 32,529 26,451 22,523 16,389
----------- ----------- ----------- --------- ----------
122,932 106,046 71,257 55,103 44,393
Convertible Subordinated
Debentures........................ 6,330 6,755 7,815 9,815 11,865
Other Liabilities.................. 5,860 1,690 2,096 1,850 1,240
----------- ----------- ----------- --------- ----------
Total Liabilities.................. 135,122 114,491 81,168 66,768 57,498
----------- ----------- ----------- --------- ----------
Total Shareholders' Equity......... 33,338 27,238 26,754 20,251 17,695
----------- ----------- ----------- --------- ----------
Total Liabilities and Shareholders'
Equity............................ $ 168,460 $ 141,729 $ 107,922 $87,019 $ 75,193
=========== =========== =========== ========= ==========
Book Value per Share............... $5.57 $4.54 $4.60 $3.65 $3.21
===== ===== ===== ===== =====
* Restated to conform to the 1995, 1994 and 1993 presentation as a result of
adopting Statement of Financial Accounting Standards No. 113.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Premiums Written and Earned
The following table illustrates First Central Insurance's direct
premiums written and net premiums earned on a category-by-category basis for
1995, 1994, and 1993.
1995 1994 1993
---- ---- ----
(Dollars in Thousands)
Commercial Multiple Peril:
Direct Premiums Written. . . . $38,619 $32,862 $27,739
Net Premiums Earned. . . . . . 26,870 23,024 21,202
Workers' Compensation:
Direct Premiums Written. . . . $ 9,013 $10,557 $ 9,057
Net Premiums Earned. . . . . . 7,299 9,263 8,273
General Liability:
Direct Premiums Written. . . . $16,757 $13,821 $ 7,542
Net Premiums Earned. . . . . . 12,469 10,733 5,727
Automobile Liability:
Direct Premiums Written. . . . $ 5,531 $ 5,595 $ 5,753
Net Premiums Earned. . . . . . 4,487 4,838 5,114
Automobile Physical Damage:
Direct Premiums Written. . . . $ 1,606 $ 2,118 $ 2,512
Net Premiums Earned. . . . . . 1,355 1,857 2,123
All Categories (including those
set forth above and others):
Direct Premiums Written. . . . $72,294 $65,593 $53,024
Net Premiums Earned. . . . . . 53,034 50,061 42,814
Direct premiums written increased from 1994 to 1995 and from 1993
to 1994, by 10.2% and 23.7%, respectively. Such increases, were attributable
principally to the expansion of First Central Insurance's markets and
concentrated efforts by First Central Insurance's marketing department.
Net premiums earned increased from 1994 to 1995 and from 1993 to
1994, by 5.9% and 16.9%, respectively. These increases, are attributable to the
increases in premiums written due to an expansion of First Central Insurance's
markets.
Net premium written decreased 8.8% or approximately $4,900,000 in
1995 when compared to 1994. Ceded premiums increased 113.8% or approximately
$11,600,000 in 1995 when compared to 1994 due to a change in the company's
reinsurance treaty as of April 1, 1995. The endorsement to the reinsurance
treaty changed the calculation of reinsurance premium from a percentage of
earned premiums to a percentage of written premiums although reinsurance
premiums will continue to be paid when earned. The effect of this endorsement is
a change in the manner by which the Company
18
accounts for reinsurance ceded resulting in a decrease in net premiums written
and a decrease in unearned premiums. The endorsement also produces a liability;
Funds held for reinsurance treaty of $3,704,947 at December 31, 1995.
Net Investment Income; Realized Gains
During 1995 First Central Insurance, in an effort to upgrade its
investment portfolio, sold approximately $16,400,000 of preferred stock and
corporate notes and purchased government securities, therefore showing an
increase in interest received on government securities while a decrease in
corporate bond interest and dividends on preferred stock. In 1995, net
investment income increased 2.5% when compared to 1994. This increase was due to
the 22.7% (approximately $18,600,000) increase in invested assets during 1995.
First Central Insurance recognized a net realized gain of $1,100,200 in 1995 as
compared to the net realized gain of $950,898 in 1994. The 15.7% increase in
realized gains in 1995 was principally due to an increase in the market value of
First Central Insurance's investment portfolio resulting from favorable stock
and bond market conditions evident in 1995.
In 1994 net investment income increased 20.2% when compared to
1993. This increase was due to the 11.1% (approximately $8,000,000) increase in
invested assets during 1994. During 1994, First Central recognized a net
realized gain of $950,898 as compared to $2,114,412 in 1993. The 55.0% decrease
in realized gains in 1994 was a result of a decrease in the market value of
First Central's investment portfolio due to the decline of bond prices and weak
stock market conditions evident in 1994. The 77.4% increase in realized gains
for 1993 was due primarily to the sales of fixed maturity investments after a
period of declining interest rates which had the effect of increasing the value
of the First Central's portfolio.
GAAP and SEC Staff Accounting Bulletin No. 59 require the portion
of the unrealized loss of an individual security to be recognized as a realized
loss in the accounting period when the holder determines that such portion of
the decline in the market value is other than temporary. Temporary declines in
the market value of First Central's debt securities held to maturity do not
affect First Central's carrying value of such securities, since First Central
has the ability and the intent to hold these investments to maturity, at which
time their full face value is expected to be received at no loss to First
Central. Temporary fluctuations in the market value of available for sale
securities are reflected in shareholders' equity as unrealized appreciation or
depreciation net of applicable deferred federal income taxes; however, any
decline in the value of the security below its cost considered to be "other than
temporary" is reflected as a realized loss in First Central's income statement.
Once an investment is written down to reflect an other than temporary decline,
the writedown, which is charged against operations, establishes a new cost basis
for the security.
During 1995, one security was deemed to have a decline in market
value other than temporary. As a result of a recent public announcement stating
that Discovery Zone Inc. filed for Chapter 11 bankruptcy protection, First
Central Insurance wrote down the cost of the Discovery Zone Inc. subordinated
Notes due 2000 held in First Central Insurance's investment portfolio. As of
December 31, 1995, First Central Insurance held $3,000,000 par value of this
security with a market value of $772,500. First Central Insurance realized a
loss of $555,281 on this security lowering the amortized cost to the December
31, 1995 market value of $772,500.
At December 31, 1995, the total net unrealized gain applicable to
First Central's available-for-sale securities amounted to $759,806. The
unrealized gain is net of deferred taxes of $392,000 for a total gross
unrealized gain of $1,151,806. At December 31, 1994, the total net unrealized
loss applicable to First Central's available-for-sale securities amounted to
$5,829,873, net of deferred taxes of $3,003,000 for a total gross unrealized
loss of $8,832,873. The unrealized gain in 1995 was a result of a increase in
the market value of First Central Insurance's investment portfolio in 1995. The
19
1994 increase in unrealized losses when compared to 1993 was a result of a
decline in bond prices and weak stock market conditions evident in 1994.
Losses and Loss Adjustment Expense Reserves
The amount of losses and the related loss adjustment expenses are
dependent upon a number of factors, including claims frequency and the number
and type of policies written. These factors may fluctuate from year to year, and
not necessarily in any relationship to the amount of premiums written or earned.
First Central Insurance periodically reviews its programs and
reevaluates classes of insurance which it writes.
As claims are incurred, provisions are made for unpaid losses and
loss adjustment expenses, less related reinsurance by: accumulating individual
case estimates for losses reported prior to the close of an accounting period;
estimating unreported losses based upon past experience modified for current
trends; and estimating expenses for investigating and adjusting claims based
upon past experience. Such liabilities are necessarily subject to the impact of
future changes in claims severity. Notwithstanding the variability inherent in
such estimates, First Central Insurance's management believes that the
provisions made for unpaid losses and loss adjustment expenses are adequate.
Such estimates are continually reviewed, and as adjustments thereto become
necessary, such adjustments are reflected in current operations. As of September
1991, First Central Insurance retained an actuarial firm, Stergiou and Gruber
Risk Consultants, on a retainer, which reviews First Central Insurance's
reserves quarterly and is available on a daily basis for consultation.
Estimated salvage and subrogation recoveries are recorded after
considering the effect of payments to reinsurers based on Management's estimate
of the future recoveries applicable to claims incurred prior to December 31.
In 1995 incurred losses increased by 47.7% when compared to 1994.
This increase was due primarily to an approximate $7,400,000 increase in
incurred-but-not-reported ("IBNR") reserves and approximately $3,800,000
increase in paid losses during the 1995 year when compared to 1994. During 1995,
an extensive review of the Company's loss reserves was conducted by the
Company's independent actuary. As a result of this review IBNR reserves were
increased $8,400,000 in the fourth quarter of 1995 for a total annual increase
of approximately $11,300,000. In 1994 and 1993 incurred losses increased by
17.2% and 42.0%, respectively, when compared to the previous year. The increase
in incurred losses was attributable to the strengthening of the case and "IBNR"
reserves and due to increases in premiums written.
In 1995 incurred loss adjustment expenses increased 20.1% over
the corresponding period in 1994. This increase was due primarily to an increase
in paid loss adjustment expenses. In 1994 incurred loss adjustment expenses
increased by 6.9%, in comparison to 1993. This increase was due to an increase
in paid allocated and unallocated loss adjustment expenses.
First Central Insurance's loss ratio on its commercial multiple
peril line of insurance increased to 70.2% in 1995 compared to 43.1% in 1994 and
33.4% in 1993. The increased loss ratio in the 1995 year was due primarily to
approximately $6,800,000 increase in "IBNR" reserves when compared to 1994.
In 1995 First Central's loss ratio on its workers' compensation
line of business increased to 50.9% in 1995 primarily due to approximately
$1,600,000 increase in "IBNR" reserves when compared to 1994. In 1994, First
Central Insurance's loss ratio on its workers' compensation line of
20
business decreased to 41.6% compared to 58.1% in 1993. This decrease was due to
less losses incurred and an increase in premiums earned.
In 1995, 1994 and 1993, First Central Insurance's loss ratio on
its general liability line of insurance increased in comparison to its prior
year's loss ratio; the 1995 ratio of 62.0%, 1994 ratio of 47.6% and the 1993
ratio of 31.9%. The loss ratio in 1995 increased primarily due to an increase in
IBNR reserves of approximately $2,400,000 when compared to 1994.
First Central Insurance's loss ratio on its automobile liability
line of insurance increased to 80.7% in 1995 from 77.8% in 1994 and 87.9% in
1993, primarily due to the private passenger portion of the automobile liability
line of business. Due to the historically increasing loss ratios on private
passenger automobile liability insurance, First Central Insurance reviews this
line and limits writings to the amount necessary to satisfy state insurance
regulations. Additionally, First Central Insurance received permission from NYS
Insurance Department to increase rates on private passenger automobile liability
insurance which was implemented in December 1993.
In 1995, First Central Insurance's loss ratio on automobile
physical damage line of business decreased to 47.7% when compared to 50.4% in
1994 and 66.5% in 1993 due to the continuing review and limitation of writings
on this line of business. First Central Insurance has implemented restrictive
guidelines in respect of the underwriting of this line of business.
Underwriting Expenses and Underwriting Expense Ratio
Underwriting Expenses are a combination of Policy Acquisition
Costs and Other Operating Expenses as shown on the statement of income.
In 1995 First Central's underwriting expenses decreased 0.9% when
compared to 1994. This was a result of First Central Insurance's policy
acquisition costs decreasing 1.0% and other operating expenses decreasing 0.7%
when compared to the same period in 1994. The decrease in underwriting expenses
was primarily due to an increase in ceded commissions and a decrease in rent
offset by increases in commissions, premium taxes, real estate expenses, payroll
and depreciation.
In 1994 First Central's underwriting expense increased by 5.7%
over such expenses for 1993 while the underwriting expense ratio decreased from
35.2% in 1993 to 31.2% in 1994. The underwriting expenses in 1994 exceeded prior
year amounts primarily due to additional premium tax expenses incurred and
additional employee staffing, both as a result of an increase in premium
writing, offset in part by a decrease in amortization expense.
Interest Expense
First Central's interest expense in 1995, 1994 and 1993 was
approximately $607,000, $642,000 and $827,000, respectively. The interest
expenses were attributable primarily to interest paid under the Debentures which
were sold between September 1988 and January 1989. The interest expense is
decreasing due primarily to First Central's purchase, retirement and conversions
of an aggregate of $5,920,000 principal amount of the original $12,250,000
aggregate principal amount of the Debentures. In 1995, 1994 and 1993, $425,000,
$1,060,000 and $2,000,000 principal amount of the Debentures, respectively, were
purchased and retired.
Provision for Doubtful Accounts
The provision for doubtful accounts during 1995, 1994, and 1993
was $695,865, $1,056,557 and $542,730, respectively. The 1995 decrease in the
provision was due to a smaller
21
percentage of auditable policies issued during the 1995 year. The 1994 and 1993
increases in the provision for doubtful accounts is directly related to the
increase in premium writing and the resulting increase in agents' balances.
Other Operating Expenses
Operating expenses remained consistant for 1995 when compared to
1994. Operating expenses increased by 8.3% in 1994 when compared to 1993. This
increase was due to additional personnel and the related increase in payroll
expenses in 1994.
Net Income
Net income decreased 93.7% in 1995 when compared to 1994. This
was a result of an increase in IBNR reserves and paid losses (see "Losses and
Loss Adjustment Expense Reserves" above) as offset by increases in earned
premiums, net investment income, realized gains, and claims adjusting revenue
and a decrease in interest expense, underwriting expenses and doubtful accounts
and income taxes.
Net income increased 27.0% in 1994 when compared to 1993. This
was a result of increases in earned premiums, net investment income, and a
decrease in interest expense offset in part by an increase in losses, loss
adjustment expenses, underwriting expenses, doubtful accounts and other
operating expenses, and a decrease in claims adjusting revenues and realized
gains.
Reinsurance
First Central Insurance reinsures a portion of substantially all
of the risks which it underwrites. First Central Insurance has entered into
reinsurance treaties with Nat Re covering all risks underwritten by First
Central Insurance. First Central Insurance also maintains an automatic
facultative property loss reinsurance facility with Munich American and Swiss
Re. See "Business -- Reinsurance Ceded" and Note 4 of the Notes to First
Central's Consolidated Financial Statements for a discussion of those treaties.
In 1995, the First Central Insurance ceded premiums of
approximately $21,726,000 on approximately $72,294,000 of direct written premium
whereas, in 1994, premiums of approximately $10,163,000 were ceded on
approximately $65,593,000 of direct written premium. The increase in ceded
premiums for 1995 was due to an increase in reinsurance rates and also a change
in accounting procedures (see"Premiums Written and Earned"). Paid losses
recovered by First Central Insurance in 1995 and 1994 amounted to approximately
$6,592,000 and $2,967,000, respectively.
A contingent commission from Swiss Re, based on First Central
Insurance's 1994 loss ratio with them, in the amount of $91,226 was received in
February 1995. For the year ended December 31, 1995 a contingent commission, in
the amount of $62,110, was due to First Central Insurance.
As a result of the actuarial report performed on the December 31,
1994 loss and loss adjustment expense reserves, the ceded IBNR was increased
$10,000,000. The effect of this increase was offset by the additional direct
IBNR of $13,900,000 .
Although First Central Insurance believes it will be able to
maintain its heretofore satisfactory relations with its reinsurers, the ability
of First Central Insurance to directly underwrite increased volumes of insurance
could be materially adversely affected in the event that one or more of its
reinsuring arrangements is terminated and First Central Insurance is unable to
replace or increase its reinsurance coverage.
22
Liquidity and Capital Resources
The business capacity of an insurance company is based on its
liquidity and capital resources. Insurance statutes and regulations which apply
to insurers require maintenance of prescribed amounts in capital and surplus as
well as statutory deposits with insurance authorities. The assets of insurers
are maintained in statutorily prescribed investments. Insurers are also required
to set up and have reserves for losses and loss adjustment expenses.
Furthermore, substantial statutory and regulatory restrictions are imposed upon
an insurer's ability to declare and pay cash dividends. See "Investments and
Investment Portfolio", "Regulation", "Dividends" and "Losses and Loss Adjustment
Expense Reserves" for a discussion of the foregoing factors as they relate to
First Central Insurance. See also "Reinsurance".
First Central and First Central Insurance's capital resources and
liquidity relative to their assets have increased during the past number of
years as a result of the infusion of $3.9 million net proceeds of First
Central's initial public offering in 1985, $5.1 million net proceeds derived by
First Central from the exercise of warrants in 1990 and the net proceeds of
approximately $10.7 million derived by First Central from a private placement of
its Debentures in 1988 and 1989.
During 1992, 114,286 units each consisting of a share of common
stock and a three year warrant exercisable at $7.00 per share were privately
placed with one institutional investor at a price of $7.00 per unit for a total
purchase price of $800,002. In March 1993, 153,846 units each consisting of a
share of common stock, a two year warrant exercisable at $7.00 per share and a
three year warrant exercisable at $7.50 per share were privately placed with a
second institutional investor at a price of $6.50 per unit for a total purchase
price of $1,000,000. The first placement was rescinded and replaced with a sale
of 123,077 units to the same investor on terms conforming to the second
placement. $1,000,000 principal amount of First Central's 9% Convertible
Subordinated Debentures due 2000 were purchased at par from the investor in the
first placement. $1,500,000 principal amount of such debentures were purchased
at par from the investor in the second placement. In December 1993, 153,846
units each consisting of a share of common stock and a warrant exercisable at
$7.50 per share on or prior to March 19, 1996 were privately placed with the
investor in the second placement at a price of $6.50 per unit for a total
purchase price of $1,000,000. During 1994, 192,307 units each consisting of a
share of common stock and a warrant exercisable at $7.50 per share on or before
August 31, 1996, were privately placed with two institutional investors and a
reinsurance company at $6.50 per unit for a total purchase price of $1,250,000.
Management is unaware of any trend which is reasonably likely to
result in a further increase or decrease in First Central's or First Central
Insurance's liquidity or capital resources except, as First Central Insurance's
assets and investments have increased, the availability of investable funds have
resulted in increased investment income and improved cash flow, and hence some
increased liquidity of First Central Insurance. However, First Central may from
time to time repurchase shares of its common stock if the appropriate conditions
exist. In addition, the liquidity of the investment portfolio of an insurance
company is important to its ability to maximize investment return which is a
significant component of overall profitability. The portfolio of First Central
Insurance included holdings of short- term investments with a maturity period of
one year or less equal to 2.9%, 10.7% and, 6.4% in 1995, 1994, and 1993,
respectively, of the total investments.
First Central intends to fund its interest payment obligations
(currently $569,700 per year) under its outstanding Debentures from the
dividends it receives or may receive from First Central Insurance. Currently,
the maximum amount which may be distributed as dividends by First Central
Insurance is approximately $2,635,000.
23
In accordance with FASB Statement No. 115, unrealized gains or
losses on securities are classified as available for sale are reported, net of
the related deferred tax effect, as increases or decreases in shareholders'
equity. At December 31, 1995, the total net unrealized gain applicable to First
Central's available for sale securities amounted to $759,806, net of deferred
taxes of $359,000. During 1994, First Central Insurance hired additional
investment advisors who continually analyze First Central's investment
portfolio.
Income Taxes
The Tax Reform Act of 1986 (the "1986 Tax Act"), and the Revenue
Reconciliation Act of 1990 (the "1990 Tax Act"), contain provisions which
significantly affect the taxation of insurance companies. Some of the major
provisions of the 1986 Tax Act and the 1990 Tax Act are summarized below.
The 1986 Tax Act contained provisions which significantly
increased the federal income tax liabilities of property and casualty insurance
companies, including First Central Insurance. Under the 1986 Tax Act, the
reserve deduction for unpaid losses previously allowed to property and casualty
insurance companies was modified in a manner which has resulted in increases in
First Central Insurance's taxable income. Although First Central Insurance still
is able to establish reserves for the estimated amount of losses incurred, the
amount of such reserves must be discounted to reflect the present value of its
liability to pay anticipated claims (using a discount rate of 100% of the
average of the applicable federal mid-term rates). Furthermore, with respect to
investments acquired after August 7, 1986, the 1986 Tax Act reduced the loss
reserve deduction of property and casualty companies by 15% of any tax exempt
interest income and the deductible portion of dividends received. The 1986 Tax
Act also requires property and casualty companies to reduce their annual
deduction for unearned premiums by 20% and requires the inclusion in income over
a six-year period of 20% of their unearned premium reserve outstanding as of
December 31, 1986.
For First Central Insurance, taxes payable increased due to a
requirement of the 1990 Tax Act to reduce deductions for paid and unpaid losses
by the estimated salvage and subrogation recoverable on those losses. That
change was effective for First Central Insurance's 1990 tax year, but the 1990
Tax Act provided a fresh-start adjustment that permits 87% of the estimated
salvage and subrogation recoverable as of December 31, 1990 to be excluded from
taxable income.
In addition to the foregoing provisions of the 1986 Tax Act and
the 1990 Tax Act, which specifically affects the tax treatment of property and
casualty insurance companies, both Acts also contain provisions which are
applicable to corporations generally, including First Central. Among such
provisions are (1) a decrease of the maximum federal income tax rate on
corporations to 34%; (2) a decline of the dividends received deduction for
corporations to 70%; (3) a repeal of the investment tax credit; (4) a change in
the depreciation rules; and (5) replacement of the 15% corporate add-on minimum
tax with an expanded alternative minimum tax (imposed at a 20% rate) under
which, among other items, (a) tax-exempt interest earned on certain newly issued
bonds and (b) for years 1987 through 1989, 50% of the amount by which a
corporation's pre-tax financial statement income (and for years after 1989, 75%
of the adjusted current earnings and profits of the corporation) exceeds the
alternative minimum taxable income are treated as tax preference items.
Management does not believe that the provisions of either of such
Acts have materially affected First Central's future liquidity. Management
further believes that increases in First Central's federal income tax liability
occasioned by reason of the Acts' provisions have not materially impacted upon
First Central's future results of operations or its sources or uses of capital
resources.
24
In February 1992, the Financial Accounting Standards Board
("FASB") issued Statement No. 109, "Accounting for Income Taxes," which First
Central was required to adopt on January 1, 1993. The adoption changed the
method of accounting for deferred income taxes from the deferred method to the
liability method. Under the deferred method, First Central deferred the past tax
effects of timing differences between financial reporting and taxable income.
The liability method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the reported amounts of assets and liabilities and their tax bases.
The adoption of Statement No. 109 did not have a significant
effect on the January 1, 1993 balance sheet or on the results of operations for
the year ended December 31, 1993.
First Central had gross deferred tax assets of approximately
$7,115,000 and gross deferred tax liabilities of approximately $2,650,000 as of
December 31, 1995. A valuation allowance has not been established with respect
to the deferred tax asset at December 31, 1995 since it is more likely than not
that the deferred tax asset will be fully realized, primarily because future
reversals of existing taxable temporary differences and taxable income in prior
carryback years are sufficient to realize a substantial portion of the deferred
tax assets. In addition, based on the strong earnings history of First Central,
future taxable income is expected to be sufficient to realize the benefit of the
deferred tax assets.
Capital Commitments
On January 17, 1995 First Central Insurance purchased the
premises in which it's corporate offices are located for a purchase price of
$4,000,000 in cash. Prior to purchasing the Building, management analyzed the
relative benefits and costs of the purchase verses, among other things, the
renewal of (i) First Central Insurance's lease which was to expire on November
30, 1995 and (ii) Mercury's lease in the same building which was to expire on
March 31, 1995 (See "Item 2 Properties").
Except for the purchase of the premises described above, neither
First Central, First Central Insurance, nor Mercury made any material commitment
for capital for 1995 and, does not anticipate any for 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is submitted on pages 35 to 61.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.
There have been no changes or disagreements with accountants.
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to the directors
and nominees for election to the Board of Directors of First Central is
incorporated by reference to the information set forth in First Central's
definitive proxy statement to be filed on or before April 29, 1996 pursuant to
Regulation 14A. Information with respect to executive officers of First Central
is set forth in Part I hereof at Item 4A.
25
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference
to the information set forth in First Central's definitive proxy statement to be
filed on or before April 29, 1996 pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 is incorporated by reference
to the information set forth in First Central's definitive proxy statement to be
filed on or before April 29, 1996 pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference
to the information set forth in First Central's definitive proxy statement to be
filed on or before April 29, 1996 pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Independent Auditor's Report
Consolidated Balance Sheets at December 31, 1995
and 1994
Consolidated Statements of Income for the Years
Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
The financial statement schedules filed as part of
this report are as follows:
Independent Auditor's Report on Financial Statement
Schedules
Schedule I Summary of Investments - Other than
Investments in Related Parties
26
Schedule II Condensed Financial Information of
Registrant
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule V Valuation and Qualifying Accounts
Schedule VI Supplemental Information Concerning
Property-Casualty Insurance
Operations
27
(3) Exhibits:
Exhibit
No. Description
3.1 Certificate of Incorporation of First Central Financial Corporation
("First Central") a copy of which was filed with the Commission on
December 6, 1984 as Exhibit 3.1 to First Central's Registration
Statement on Form S-18 (Reg. No. 2-94804-NY) and is hereby incorporated
herein by this reference).
3.2 Certificate of Amendment of Certificate of Incorporation of First
Central dated the 30th day of November 1984 (a copy of which was filed
with the Commission on December 10, 1984 as Exhibit 3.2 to First
Central's Registration Statement on Form S-18 (Reg. No. 2-94804-NY) and
is hereby incorporated herein by this reference).
3.3 Certificate of Amendment of Certificate of Incorporation of First
Central dated July 23, 1993 (a copy of which was filed with the
Commission on August 15, 1994 as Exhibit 3.1 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
3.4 Amended and Restated By-Laws of First Central, dated as of May 18, 1994
(a copy of which was filed with the Commission on August 15, 1994 as
Exhibit 3.2 to First Central's Quarterly Report on Form 10-Q and is
hereby incorporated by this reference).
4.1 Specimen copy of First Central's common stock certificate (a copy of
which was filed with the Commission on December 10, 1984 as Exhibit 4.1
to First Central's Registration Statement on Form S-1 (Reg. No.
2-94804-NY), and is hereby incorporated herein by this reference).
4.2 Specimen copy of First Central's 9% Convertible Subordinated Debenture
Due 2000 (a copy of which was filed as Exhibit 4.2 to Registrant's
Amendment No. 1 to its Registration Statement on Form S-1, Reg. No.
33-25264, and is hereby incorporated herein by this reference).
4.3 Indenture dated as of September 1, 1988 between First Central and
United States Trust Company of New York as Trustee (a copy of which was
filed with the Commission on October 31, 1988 as Exhibit 4.3 to First
Central's Registration Statement on Form S-1 (Reg. No. 33-25264), and
is hereby incorporated herein by this reference).
4.4 Form of Common Stock Purchase Warrant (a copy of which was filed with
the Commission on August 15, 1994 as Exhibit 4.4 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.1 Facultative Reinsurance Agreement dated September 25, 1987 between
Munich American Reinsurance Company and First Central Insurance (a copy
of which was filed with the Commission on August 15, 1994 as Exhibit
10.8 to First Central's Quarterly Report on Form 10-Q and is hereby
incorporated by this reference).
10.2 Addendum No. 1 to the Reinsurance Agreement between First Central
Insurance and Munich American Reinsurance Company, dated July 28, 1988
(a copy of which was filed with the Commission on August 15, 1994 as
Exhibit 10.9 to First Central's Quarterly Report on Form 10-Q and is
hereby incorporated by this reference).
28
10.3 Addendum No. 2 to the Reinsurance Agreement between First Central
Insurance and Munich American Reinsurance Company, dated January 1,
1989 (a copy of which was filed with the Commission on August 15, 1994
as Exhibit 10.10 to First Central's Quarterly Report on Form 10-Q and
is hereby incorporated by this reference).
10.4 Addendum No. 3 to the Reinsurance Agreement between First Central
Insurance and Munich American Reinsurance Company, dated January 1,
1992 (a copy of which was filed with the Commission on August 15, 1994
as Exhibit 10.11 to First Central's Quarterly Report on Form 10-Q and
is hereby incorporated by this reference).
10.5 Addendum No. 4 to the Reinsurance Agreement between First Central
Insurance and Munich American Reinsurance Company, dated June 18, 1993
(a copy of which was filed with the Commission on August 15, 1994 as
Exhibit 10.12 to First Central's Quarterly Report on Form 10-Q and is
hereby incorporated by this reference).
10.8 License Agreement dated September 30, 1989, between Policy Management
Systems Corporation and First Central (a copy of which was filed with
the Commission on August 15, 1994 as Exhibit 10.15 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.9 Sublease Agreement dated December 15, 1988 between First Central
Insurance and Simon General (incorporated herein by reference to
Exhibit 10.9 in First Central's Amendment No. 1 to its Registration
Statement on Form S-1, Reg. No. 33-25264).
10.10 Addendum to Sublease dated October 1, 1993 between First Central
Insurance and Simon General (a copy of which was filed with the
Commission on August 15, 1994 as Exhibit 10.17 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
*10.11 Agreement to Extend Lease dated October 12, 1995 between First Central
Insurance and Simon General.
10.12 Form of Indemnity Agreement (a copy of which was filed with the
Commission on August 15, 1994 as Exhibit 10.20 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.13 Agreement of Tax Allocation between First Central and First Central
Insurance (a copy of which was filed with the Commission on August 15,
1994 as Exhibit 10.21 to First Central's Quarterly Report on Form 10-Q
and is hereby incorporated by this reference).
10.14 Property Facultative Automatic Reinsurance Agreement between First
Central Insurance and North American Reinsurance Corp., effective
January 1, 1993 (a copy of which was filed with the Commission on
August 15, 1994 as Exhibit 10.22 to First Central's Quarterly Report on
Form 10-Q and is hereby incorporated by this reference).
10.15 Subscription Agreement between First Central and The Trustees of
General Electric Pension Trust ("G.E."), dated March 19, 1993 (a copy
of which was filed with the Commission on August 15, 1994 as Exhibit
10.23 to First Central's Quarterly Report on Form 10-Q and is hereby
incorporated by this reference).
- -----------------
* Filed herewith
29
10.16 Common Stock Purchase Warrant (Series B) issued by First Central to
G.E., dated March 19, 1993 (a copy of which was filed with the
Commission on August 15, 1994 as Exhibit 10.25 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.17 Subscription Agreement, dated April 16, 1993 between First Central and
SBSF Funds, Inc. (a copy of which was filed with the Commission on
August 15, 1994 as Exhibit 10.26 to First Central's Quarterly Report on
Form 10-Q and is hereby incorporated by this reference).
10.18 Common Stock Purchase Warrant (Series B) issued by First Central to
Atwell dated April 16, 1993 (a copy of which was filed with the
Commission on August 15, 1994 as Exhibit 10.28 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.19 Subscription Agreement, dated December 3, 1993 between First Central
and GE (a copy of which was filed with the Commission on August 15,
1994 as Exhibit 10.29 to First Central's Quarterly Report on Form 10-Q
and is hereby incorporated by this reference).
10.20 Common Stock Purchase Warrant (Series B) issued by First Central to GE,
dated December 3, 1993 (a copy of which was filed with the Commission
on August 15, 1994 as Exhibit 10.30 to First Central's Quarterly Report
on Form 10-Q and is hereby incorporated by this reference).
10.21 Stock Option, dated September 10, 1993, granted to Martin J. Simon by
First Central (a copy of which was filed with the Commission on August
15, 1994 as Exhibit 10.31 to First Central's Quarterly Report on Form
10-Q and is hereby incorporated by this reference).
10.22 Employment Agreement, dated as of March 18, 1994, by and between First
Central and Martin J. Simon (a copy of which was filed with the
Commission on August 15, 1994 as Exhibit 10.32 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.23 Software License Agreement, dated May 4, 1994, between the Wheatley
Group, Ltd. and First Central Insurance (a copy of which was filed with
the Commission on August 15, 1994 as Exhibit 10.33 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.24 Multiple Line Excess of Loss Reinsurance Agreement between First
Central Insurance and National Reinsurance Corporation, dated January
1, 1994 (a copy of which was filed with the Commission on August 15,
1994 as Exhibit 10.34 to First Central's Quarterly Report on Form 10-Q
and is hereby incorporated by this reference).
10.25 Endorsement No. 1 of Agreement No. 3522-01002 Multiple Line Excess of
Loss Reinsurance Agreement between First Central Insurance and National
Reinsurance Corporation, dated January 1, 1994 (a copy of which was
filed with the Commission on August 15, 1994 as Exhibit 10.35 to First
Central's Quarterly Report on Form 10-Q and is hereby incorporated by
this reference).
10.26 Investment Advisory Agreement, dated June 30, 1994 between First
Central Insurance and Cramer Rosenthal McGlynn, Inc. (a copy of which
was filed with the Commission on August 15, 1994 as Exhibit 10.36 to
First Central's Quarterly Report on Form 10-Q and is hereby
incorporated by this reference).
10.27 Contract of Sale, dated October 18, 1994 between Lynbrook Court
Associates and First Central Insurance (a copy of which was filed with
the Commission on March 31, 1994 as Exhibit 10.37 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
30
10.28 Subscription Agreement, dated August 19, 1994, between First Central
and CRM Retirement Partners, L.P. ("CRM") (a copy of which was filed
with the Commission on March 31, 1994 as Exhibit 10.38 to First
Central's Quarterly Report on Form 10-Q and is hereby incorporated by
this reference).
10.29 Common Stock Purchase Warrant (Series C) issued by First Central to
CRM, dated August 19, 1994 (a copy of which was filed with the
Commission on March 31, 1994 as Exhibit 10.39 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.30 Subscription Agreement, dated August 19, 1994, between First Central
and CRM (a copy of which was filed with the Commission on March 31,
1994 as Exhibit 10.40 to First Central's Quarterly Report on Form 10-Q
and is hereby incorporated by this reference).
10.31 Common Stock Purchase Warrant (Series C) issued by First Central to
CRM, dated August 19, 1994 (a copy of which was filed with the
Commission on March 31, 1994 as Exhibit 10.41 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.32 Subscription Agreement, dated September 2, 1994, between First Central
and National Reinsurance Corp. (a copy of which was filed with the
Commission on March 31, 1994 as Exhibit 10.42 to First Central's
Quarterly Report on Form 10-Q and is hereby incorporated by this
reference).
10.33 Common Stock Purchase Warrant (Series C) issued by First Central to
National Reinsurance Corp, dated August 2, 1994 (a copy of which was
filed with the Commission on March 31, 1994 as Exhibit 10.43 to First
Central's Quarterly Report on Form 10-Q and is hereby incorporated by
this reference).
*11 Computation of Per Share Earnings.
*12 Computation of Ratio of Earnings to Fixed Charges.
21 List of Subsidiaries (incorporated by reference to Exhibit 22 to the
Registrant's Amendment No. 1 to its Registration Statement on Form S-1
Reg. No. 33-25264).
*23 Consent of McGladrey & Pullen, LLP.
+28 Schedule P to the Annual Statement provided by First Central Insurance
to the New York Insurance Department for the year ended December 31,
1995.
- -------------------------
* filed herewith
+ filed pursuant to Item 304 of Regulation S-T under cover of Form SE.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the last quarter of
fiscal 1995.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST CENTRAL FINANCIAL CORPORATION
By: /s/ MARTIN J. SIMON
-----------------------------------
March 29, 1996 Martin J. Simon, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Martin J. Simon President (Principal March 29, 1996
- ------------------------------- Executive Officer
Martin J. Simon and Director
/s/ Joel I. Dollinger Executive Vice President March 29, 1996
- ------------------------------- and Director
Joel I. Dollinger
/s/ Harvey Mass Senior Vice President and March 29, 1996
- ------------------------------- Director
Harvey Mass
/s/ Joan M. Locascio Treasurer, Vice President March 29, 1996
- ------------------------------- (Chief Financial
Joan M. Locascio and Accounting Officer)
and Director
/s/ Raymond F. Brancaccio Vice President and March 29, 1996
- ------------------------------- Secretary
Raymond F. Brancaccio
/s/ Allan R. Goodman Vice President and Director March 29, 1996
- -------------------------------
Allan R. Goodman
/s/ Joseph P. Ciorciari Director March 29, 1996
- -------------------------------
Joseph P. Ciorciari
/s/ Ralph J. Drabkin Director March 29, 1996
- -------------------------------
Ralph J. Drabkin
/s/ Saul Erdman Director March 29, 1996
- -------------------------------
Saul Erdman
32
Director
- ----------------------------
Herbert V. Friedman
/s/ Louis Gottlieb Director March 29, 1996
- ----------------------------
Louis Gottlieb
/s/ Louis V. Siracusano Director March 29, 1996
- ----------------------------
Louis V. Siracusano
/s/ Seymour D. Uslan Director March 29, 1996
- ----------------------------
Seymour D. Uslan
33
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
First Central Financial Corporation
Lynbrook, New York
We have audited the accompanying consolidated balance sheets of First Central
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Central
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 3, the Company adopted Statement of Financial Accounting
Standards No. 115 on January 1, 1994 and changed its method of accounting for
certain investments in debt and equity securities.
McGladrey & Pullen, LLP
New Haven, Connecticut
March 6, 1996
FIRST CENTRAL FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Balance Sheets
December 31 December 31
1995 1994
-----------------------------------
ASSETS
Investments (Note 3)
Securities available-for-sale, at market value:
Fixed maturities (amortized cost 1995 - $35,181,479;
1994 - $33,426,715) $ 35,640,019 $ 30,574,904
Equity securities (cost; 1995 - $28,011,278; 1994 -
$38,782,895) 28,704,546 32,801,833
Fixed maturity securities held-to-maturity at amortized
cost (market 1995 - $33,693,837; 1994 - $9,896,497) 33,415,757 9,937,037
Short-term investments, at cost, which approximates market 2,918,369 8,759,364
-----------------------------------
Total Investments 100,678,691 82,073,138
Cash 1,499,829 409,612
Accrued investment income 835,720 944,470
Agents' balances, less allowance for doubtful accounts
(1995 - $1,554,074; 1994 - $1,321,936) (Note 7) 17,871,850 15,202,267
Reinsurance receivables on unpaid losses 19,541,811 24,589,577
Reinsurance receivables on paid losses 817,681 243,504
Prepaid reinsurance premiums 8,206,455 1,973,997
Federal income taxes recoverable 2,467,225 154,262
Other receivables 333,234 139,444
Deferred policy acquisition costs (Note 5) 6,351,976 7,339,084
Deferred debenture costs 438,603 541,696
Deferred income taxes (Note 6) 4,465,000 6,280,000
Property and equipment less accumulated depreciation
(1995 - $1,639,866; 1994 - $1,562,814) (Note 13) 4,523,949 1,045,799
Other assets 428,325 791,730
-----------------------------------
$ 168,460,349 $141,728,580
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities (Note 8)
Unpaid losses $ 78,887,340 $ 66,499,524
Unpaid loss adjustment expenses 7,749,141 7,016,895
Unearned premiums 36,295,661 32,529,415
-----------------------------------
Total Policy Liabilities 122,932,142 106,045,834
Funds held for reinsurance treaty 3,704,947 -
Reinsurance payable (Note 4) 1,393,663 503,684
Obligation under capital leases (Note 16) - 84,744
Convertible subordinated debentures (Note 12) 6,330,000 6,755,000
Other liabilities 761,988 1,101,335
-----------------------------------
Total Liabilities 135,122,740 114,490,597
-----------------------------------
Commitments and contingencies (Notes 4, 13 and 16)
Shareholders' Equity (Notes 3, 9, 10, 12, and 14)
Common Stock, par value $.10 per share authorized -
20,000,000 shares; issued (1995 - 6,589,012 shares;
1994 - 6,576,512 shares) 658,902 657,652
Additional paid-in capital 13,209,395 13,139,551
Net unrealized appreciation (depreciation) on securities
available for sale, net of deferred taxes of
(1995 - $392,000; 1994 - $3,003,000) 759,806 (5,829,873)
Retained earnings 22,826,898 23,189,795
-----------------------------------
37,455,001 31,157,125
Less treasury stock, at cost (1995 - 600,404 shares;
1994 - 572,404 shares) (4,117,392) (3,919,142)
-----------------------------------
Total Shareholders' Equity 33,337,609 27,237,983
-----------------------------------
$ 168,460,349 $141,728,580
===================================
See Notes to Consolidated Financial Statements.
34
FIRST CENTRAL FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31
--------------------------------------------
1995 1994 1993
--------------------------------------------
REVENUES
Premiums written - Direct (Note 7) $ 72,293,513 $ 65,592,939 $ 53,023,533
Reinsurance ceded (Note 4) (21,725,782) (10,162,490) (6,531,054)
--------------------------------------------
Net Premiums Written 50,567,731 55,430,449 46,492,479
Decrease (increase) in unearned premiums 2,466,212 (5,369,722) (3,678,385)
--------------------------------------------
Net Premiums Earned 53,033,943 50,060,727 42,814,094
Net investment income (Note 3) 4,904,755 4,783,872 3,978,630
Realized gain on investments (Note 3) 1,100,200 950,898 2,114,412
Claims adjusting revenues 653,714 469,228 540,324
Rental income 204,690 - -
--------------------------------------------
Total Revenues 59,897,302 56,264,725 49,447,460
--------------------------------------------
EXPENSES
Losses 34,724,208 23,514,168 20,060,511
Loss adjustment expense (Notes 7, 8) 7,337,057 6,109,775 5,713,571
Policy acquisition costs (Note 5) 12,691,206 12,813,100 12,223,041
Interest expense 606,619 641,696 826,688
Provision for doubtful accounts 695,865 1,056,557 542,730
Other operating expenses 4,437,794 4,469,784 4,129,030
--------------------------------------------
Total Expenses 60,492,749 48,605,080 43,495,571
--------------------------------------------
Income (Loss) Before Income Taxes (595,447) 7,659,645 5,951,889
Income Taxes (Note 6) (956,000) 1,943,500 1,450,000
--------------------------------------------
Net Income $ 360,553 $ 5,716,145 $ 4,501,889
============================================
Per Share Data:
Primary:
Net Income $0.06 $0.97 $0.80
===== ===== =====
Fully Diluted:
Net Income $0.06 $0.90 $0.75
===== ===== =====
Cash Dividends Declared $0.12 $0.105 $0.10
===== ====== =====
See Notes to Consolidated Financial Statements.
35
FIRST CENTRAL FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1995, 1994, and 1993
Net Unrealized
Depreciation on
Additional Net Unrealized Securities
Common Stock Paid-In Depreciation on Available Retained Treasury Stock
Shares Amount Capital Equity Securities For Sale Earnings Shares Amount Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1992 6,067,773 $606,777 $10,238,432 $(1,087,063) $ - $14,175,155 521,556 $(3,681,868) $20,251,433
Add (deduct):
Net income 4,501,889 4,501,889
Cash dividends
declared (.10
per share) (568,220) (568,220)
Purchase shares
of treasury stock 44,648 (196,636) (196,636)
Decrease in
unrealized
depreciation 983,351 983,351
Issuance of
additional shares 316,432 31,644 1,750,355 1,781,999
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1993 6,384,205 638,421 11,988,787 (103,712) 18,108,824 566,204 (3,878,504) 26,753,816
Add(deduct):
Net income 5,716,145 5,716,145
Cash dividends
declared (.105
per share) (635,174) (635,174)
Purchase shares
of treasury stock 6,200 (40,638) (40,638)
Increase in
unrealized
depreciation on
securities
available for
sale net of
deferred taxes (5,741,161) (5,741,161)
Issuance of
additional shares 192,307 19,231 1,150,764 1,169,995
Adoption of SFAS
No. 115 (Note 3) 103,712 88,712 15,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1994 6,576,512 657,652 13,139,551 - (5,829,873) 23,189,795 572,404 (3,919,142) 27,237,983
Add(deduct):
Net income 360,553 360,533
Cash dividends
declared (.12
per share) (723,450) (723,450)
Purchase shares
of treasury stock 28,000 (198,250) (198,250)
Decrease in
unrealized
depreciation on
securities
available for
sale net of
deferred taxes 6,589,679 6,589,679
Issuance of
additional shares 12,500 1,250 69,844 71,094
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1995 6,589,012 $658,902 $13,209,395 - $ 759,806 $22,826,898 600,404 $(4,117,392) $33,337,609
===================================================================================================================================
See Notes to Consolidated Financial Statements.
36
FIRST CENTRAL FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31
------------------------------------------
1995 1994 1993
-------------- ------------- -------------
OPERATING ACTIVITIES
Net Income $ 360,553 $ 5,716,145 $ 4,501,889
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs 7,339,084 6,451,030 6,022,404
Provision for depreciation and amortization 609,227 518,419 612,573
Provision for losses on uncollectible receivables 695,865 318,356 557,355
Net realized investment gains (1,100,200) (950,898) (2,114,412)
Provision for deferred federal income taxes (1,580,000) (1,002,000) (658,000)
Change in operating assets and liabilities:
Decrease (increase) in accrued investment income 108,750 (102,492) 37,115
Change in agents' balances and unearned premiums (2,126,712) 1,198,641 2,291,072
Change in unpaid losses, unpaid loss adjustment
expenses, and reinsurance recoverable 17,593,650 11,423,279 8,610,445
Deferred policy acquisition costs (6,351,976) (7,339,084) (6,451,030)
Other items, net (2,029,992) 704,574 701,579
-------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,518,249 16,935,970 14,110,990
-------------------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturities (80,118,996) (18,183,594) (62,835,833)
Sales and maturities of fixed maturities 54,768,768 18,452,975 57,695,963
Purchases of equity securities (17,574,355) (34,367,822) (50,017,400)
Sales of equity securities 29,587,427 22,148,307 42,858,408
Net sales (purchases) of short-term investments 5,840,995 (4,006,878) 55,315
Purchases of property and equipment (3,571,521) (542,577) (72,678)
Deposit on purchase of building - (401,000) -
-------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,067,682) (16,900,589) (12,316,225)
-------------------------------------------
FINANCING ACTIVITIES
Principal payments on convertible subordinated debentures (425,000) (1,060,000) (2,000,000)
Principal payments on capital lease obligations (84,744) (159,681) (208,427)
Cash dividend paid (723,450) (635,174) (568,220)
Proceeds from issuance of shares of common stock 71,094 1,169,995 1,781,999
Purchase of shares of common stock for the treasury (198,250) (40,638) (196,636)
-------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (1,360,350) (725,498) (1,191,284)
-------------------------------------------
INCREASE (DECREASE) IN CASH 1,090,217 (690,117) 603,481
CASH AT BEGINNING OF YEAR 409,612 1,099,729 496,248
-------------------------------------------
CASH AT END OF YEAR $ 1,499,829 $ 409,612 $ 1,099,729
===========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 624,000 $ 681,000 $ 901,000
===========================================
Income Taxes $ 2,934,000 $ 2,102,000 $ 2,612,000
===========================================
See Notes to Consolidated Financial Statements.
37
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION
First Central Financial Corporation ("First Central" or the "Company") is a New
York State corporation. First Central's wholly-owned subsidiaries are First
Central Insurance Company ("First Central Insurance"), a property/casualty
insurance company, and Mercury Adjustment Bureau, Inc. ("Mercury"), a claim
adjustment and investigation company.
Revenues are derived principally through First Central Insurance, which is
engaged in insuring property and casualty risks (principally commercial multiple
peril, workers' compensation, general liability, automobile liability and
physical damage in the state of New York). First Central Insurance cedes to
reinsurers a certain portion of its coverages to limit its share of potential
losses on individual claims (see Note 4).
First Central Insurance receives a significant portion of its business from a
general agent who is deemed to be a related party and one other who is not a
related party (see Note 7). The loss of the business relationship that First
Central Insurance has with either of these two general agents could have a
materially adverse effect upon its future operations.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements, which have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP") and which,
with respect to First Central Insurance, differ in some respects from the
Statutory Accounting Principles ("SAP") prescribed or permitted by the
regulatory authorities, follows:
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts and operations of First Central, First Central Insurance
and Mercury after eliminating all significant intercompany balances and
transactions.
Accounting Estimates: Managements considers available facts and knowledge of
existing circumstances when establishing estimated amounts included in the
financial statements. While it does not generally expect significant near-term
changes in estimated amounts reflected in the accompanying consolidated
financial statements, operating in the insurance industry requires management to
utilize historical experience and assumptions about future events and
circumstances in order to develop estimates of material reported amounts and
disclosures. Included among the material (or potentially material) reported
amounts and disclosures that require extensive use of estimates are (1) salvage
and subrogation, (2) fair values of investments in securities and other
financial instruments, (3) policy liabilities and (4) deferred policy
acquisition costs. Estimates regarding all of the preceding are inherently
subject to change and are reassessed by management as of each reporting date.
Recognition of Premium Revenues: Premiums are recognized as revenue ratably over
the terms of the related insurance policies (generally one year). Unearned
premiums are calculated using the daily pro-rata basis.
Investment in Debt and Marketable Equity Securities and Accounting Change: First
Central has investments in debt and marketable equity securities. Debt
securities consist primarily of obligations of
38
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES--Continued
the U.S. government, state governments and domestic corporations. Marketable
equity securities consist primarily of common and preferred stocks that are
traded or listed on national exchanges.
First Central adopted the provisions of FASB Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", as of January 1, 1994.
Statement 115 requires that management determine the appropriate classification
of securities at the date of adoption, and thereafter at the date individual
investment securities are acquired, and that the appropriateness of such
classification be reassessed at each balance sheet date. The classification of
these securities and the related accounting policies are as follows:
Securities held-to-maturity: Securities classified as held to maturity are those
debt securities First Central has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premiums or discounts and other-than-temporary declines in
fair value.
Securities available-for-sale: Securities classified as available for sale are
those debt securities that First Central intends to hold for an indefinite
period of time but not necessarily to maturity and equity securities not
classified as held for trading. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the First Central's
assets and liabilities, liquidity needs, regulatory capital considerations, and
other similar factors. Securities available for sale are reported at fair value
adjusted for other-than-temporary declines in fair value. Unrealized gains or
losses are reported as increases or decreases in shareholders' equity, net of
the related deferred tax effect. Realized gains or losses, determined on the
first-in, first-out method, are included in earnings.
Securities held for trading: Trading securities, if any, which are generally
held for the short term in anticipation of market gains, are recorded at their
fair value. Realized and unrealized gains and losses on trading account assets
are recognized in the income statement.
Prior to the adoption of Statement 115, First Central stated its debt securities
at amortized cost. The marketable equity securities were stated at market value,
with unrealized losses charged to a separate component of shareholders' equity.
Under both the newly adopted accounting standard and the Company's former
accounting practices, premiums and discounts on investments in debt securities
are amortized over their contractual lives. Interest on debt securities is
recognized in income as accrued, and dividends on marketable equity securities
are recognized in income when declared. Realized gains and losses including
losses from declines in value of specific securities determined by management to
be other-than-temporary, are included in income. Realized gains and losses are
determined on the basis of the first-in, first-out method. Short-term
investments are stated at cost, which appropriates market.
Note 3 to the financial statements provides further information about the effect
of adopting Statement 115.
Policy Acquisition Costs: Commissions, premium taxes, and other costs that vary
with and are primarily related to the production of new and renewal business are
deferred and amortized over the terms of the policies or reinsurance treaties to
which they relate. Deferred policy acquisition costs are limited to the amounts
estimated to be recoverable from the related unearned premiums after giving
effect to anticipated losses, loss adjustment expenses, and expenses necessary
to maintain the premiums in force, which are
39
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES--Continued
based on reasonable groupings of business, consistent with the manner of
acquiring, servicing, and measuring the profitability of such business. When the
anticipated losses, loss adjustment expenses, and policy maintenance expenses
exceed the related unearned premiums, and anticipated investment income, a
provision for the indicated deficiency is recorded.
Insurance Liabilities: The liabilities for unpaid losses and loss adjustment
expenses represent estimated amounts determined from loss reports and individual
cases and an amount, based on past experience of First Central and comparable
industry experience, for losses incurred but not reported. Such liabilities are
necessarily based on estimates and, while management believes that the amounts
included in the accompanying financial statements are adequate, the ultimate
liabilities may vary from the estimated amounts provided. The methods for making
such estimates and for establishing the resulting liabilities are continually
reviewed by the claims department, and any adjustments are reflected in earnings
currently. As of September 1991, First Central Insurance retained an actuarial
firm, Stergiou and Gruber Risk Consultants, who on a quarterly basis, prepares a
review of loss reserves and with the exception of September 1995, prepares a
quarterly report. The liabilities for unpaid losses and loss adjustment expenses
are reported net of estimated salvage and subrogation recoverable of
approximately $1,663,000 and $1,060,000 at December 31, 1995 and December 31,
1994, respectively.
Reinsurance: In the normal course of business, First Central Insurance seeks to
reduce the losses arising from insured claims by reinsuring certain levels of
risk among the various lines of business with reinsurers. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy. The effects of subsequent changes to the
estimates are recognized into earnings in the year of change.
Income Taxes: First Central, First Central Insurance, and Mercury file a
consolidated federal income tax return.
As discussed in Note 6, First Central adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" effective January 1, 1993. The
adoption changed the method of accounting for deferred income taxes from the
deferred method to the liability method. In accordance with Statement No. 109,
deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carry forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Amortization and Depreciation: Goodwill, included in other assets, is being
amortized on a straight-line basis over a period of 40 years. Amortization of
the costs associated with the issuance of the convertible subordinated
debentures is provided using the effective interest method (see Note 12).
Equipment is recorded at cost and is being depreciated using the straight-line
method over periods ranging from five to seven years.
Building including related equipment and improvements are also recorded at cost
and are being depreciated using that straight-line method over periods ranging
from five to thirty-nine years.
40
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES--Continued
Income Per Share Data: Primary net income per share is based on the weighted
average number of shares of common stock and common stock equivalents (warrants
and options) outstanding during each year. Fully diluted net income per share
assumes, beginning in September l988, the conversion of the convertible
subordinated debentures (date of issue September l, l988). For the years ended
December 3l, 1995, 1994, and l993 the weighted average number of shares used in
the primary earnings per share computation were 6,037,606, 5,926,401, and
5,649,207 respectively. For the years ended December 31, 1995, 1994 and 1993
weighted average number of shares used in the fully diluted earnings per share
computation were 6,037,606, 6,836,758 and 6,692,975 respectively.
As discussed in Note 2, the Company adopted FASB Statement No. 115 as of January
1, 1994. In accordance with Statement 115, the 1993 comparative financial
statements have not been restated for the change in accounting principle. The
adoption of Statement 115 had no effect on net income. The January 1, 1994
balance of shareholders' equity was increased by $15,000, net of deferred taxes,
to recognize the net unrealized holding gain on securities at that date.
41
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 3--INVESTMENTS
At December 31, 1995 and 1994, the amortized cost, gross unrealized holding
gains, gross unrealized holding losses and estimated market values of
investments in available-for-sale securities and held-to-maturity securities are
summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ----------- -----------
Available-for-sale securities at
December 31, 1995:
Fixed maturity securities:
U.S. government securities $10,184,178 $195,333 $ 5,530 $10,373,981
Mortgage backed securities 3,075,406 29,483 - 3,104,889
Obligations of states and
political subdivisions 17,572,941 343,054 47,652 17,868,343
Corporate Obligations 4,348,954 82,178 138,326 4,292,806
----------- ---------- ----------- -----------
Total Fixed Maturities 35,181,479 650,048 191,508 35,640,019
Equity securities 28,011,278 2,355,147 1,661,879 28,704,546
----------- ---------- ----------- -----------
Total $63,192,757 $3,005,195 $1,853,387 $64,344,565
=========== ========== =========== ===========
Held-to-maturity securities at
December 31, 1995:
Fixed maturity securities:
U.S. government securities $20,191,262 $ 60,742 $ 126 $20,251,878
Obligations of states and
political subdivisions 12,528,495 246,918 11,704 12,763,709
Debt securities issued by a
foreign government 696,000 - 17,750 678,250
----------- --------- ----------- -----------
Total $33,415,757 $307,660 $ 29,580 $33,693,837
=========== ========= =========== ===========
42
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 3--INVESTMENTS--Continued
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------- -------------
Available-for-sale securities at
December 31, 1994:
Fixed maturity securities:
U.S. government securities $ 8,553,618 $ 17,907 $ 170,293 $ 8,401,232
Obligations of states and
political subdivisions 12,528,753 17,158 840,982 11,704,929
Debt securities issued by a
foreign government 50,000 - - 50,000
Corporate Obligations 12,294,344 11,116 1,886,717 10,418,743
------------- ------------ ------------- -------------
Total Fixed Maturities 33,426,715 46,181 2,897,992 30,574,904
Equity securities 38,782,895 112,266 6,093,328 32,801,833
------------- ------------ ------------- -------------
Total $ 72,209,610 $ 158,447 $ 8,991,320 $ 63,376,737
============= ============ ============= =============
Held-to-maturity securities at
December 31, 1994:
Fixed maturity securities:
U.S. government securities $ 5,870,050 $ - $ 17,595 $ 5,852,455
Obligations of states and
political subdivisions 8,221,563 123,194 127,139 8,217,618
Debt securities issued by a
foreign government 631,000 - 19,000 612,000
------------- ------------ ------------- -------------
Total $ 14,722,613 $ 123,194 $ 163,734 $ 14,682,073
============= ============ ============= =============
Held-to-maturity securities were classified in the following balance sheet
captions as of December 31, 1995 and 1994:
1995 1994
------------ -------------
Short-term investments $ - $ 4,785,576
Investment in held-to-maturity securities 33,415,757 9,937,037
------------ -------------
$33,415,757 $ 14,722,613
============ =============
43
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 3--INVESTMENTS--Continued
The amortized cost and estimated market value of fixed maturities at December
31, 1995, by contractual maturity are shown below. Actual maturities may be
different because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity
------------------------- --------------------------
Amortized Amortized
Cost Market Value Cost Market Value
------------------------- --------------------------
Due in one year or less $1,018,921 $ 1,013,416 $20,148,468 $20,193,262
Due after one year through five years 7,994,518 8,124,138 2,950,128 3,004,849
Due after five years through ten years 9,098,216 9,185,017 6,312,582 6,392,596
Due after ten years through twenty years 11,151,976 11,333,749 3,230,309 3,307,103
Due after twenty years 5,917,848 5,983,699 774,270 796,027
----------- ----------- ----------- -----------
$35,181,479 $35,640,019 $33,415,757 $33,693,837
=========== =========== =========== ===========
At December 31, 1995 and 1994, investments in fixed maturity securities carried
at an amortized cost of approximately $300,000 were on deposit with regulatory
authorities as required by law.
The change in the difference between cost (principally amortized cost of bonds
and notes) and market values for fixed maturities and equity securities for
1995, 1994 and 1993 is summarized below:
1995 1994 1993
---- ---- ----
Fixed maturities:
Market value $ 69,333,856 $ 40,471,401 $ 44,170,255
Amortized cost 68,597,236 43,363,752 43,651,214
-------------- -------------- --------------
Unrealized appreciation (depreciation)
at end of year 736,620 (2,892,351) 519,041
Unrealized (depreciation) appreciation at
beginning of year (2,892,351) 519,041 207,722
-------------- -------------- --------------
Change in unrealized (depreciation)
appreciation $ 3,628,971 $ (3,411,392) $ 311,319
============== ============== ==============
Equity securities:
Market value $ 28,704,546 $ 32,801,833 $ 25,475,072
Cost 28,011,278 38,782,895 25,578,784
-------------- -------------- --------------
Unrealized appreciation (depreciation) at
end of year 693,268 (5,981,062) (103,712)
Unrealized depreciation at beginning
of year (5,981,062) (103,712) (1,087,063)
-------------- -------------- --------------
Change in unrealized
appreciation (depreciation) $ 6,674,330 $ (5,877,350) $ 983,351
============== ============== ==============
44
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 3--INVESTMENTS--Continued
The major categories of net investment income are summarized as follows:
Years Ended December 31
---------------------------------------------------
1995 1994 1993
---------------------------------------------------
Interest and dividends:
Fixed maturities $ 3,261,685 $2,513,033 $ 2,671,088
Equity securities 1,696,494 2,083,238 1,374,114
Short-term investments 413,103 342,688 119,815
------------ ------------ ------------
Total interest and dividends 5,371,282 4,938,959 4,165,017
Less investment expenses 466,527 155,087 186,387
------------ ------------ ------------
NET INVESTMENT INCOME $ 4,904,755 $4,783,872 $ 3,978,630
============ ============ ============
Proceeds from sales and redemptions of investment securities, and gross realized
gains and losses on sales of investment securities during 1995 and 1994 were as
follows:
Proceeds on Gross Gross
Proceeds Maturities and Realized Realized
Purchases on Sales Redemptions Gains Losses
--------------------------------------------------------------------
1995:
Securities
available-for-sale:
Fixed maturities $48,221,637 $50,341,365 $ 927,968 $ 890,797 $1,038,856
Equities 17,574,355 29,587,427 - 2,404,760 1,163,302
------------ ------------ ---------- ---------- ---------
65,795,992 79,928,792 927,968 3,295,557 2,202,158
Fixed maturities
classified
as held-to-maturity 31,897,359 - 3,499,435 6,801 -
------------ ------------ ---------- ---------- ----------
$97,693,351 $79,928,792 $4,427,403 $3,302,358 $2,202,158
============ ============ ========== ========== ==========
Included in the gross realized losses for 1995 is $600,281 in other than
temporary write-down of securities.
Proceeds on Gross Gross
Proceeds Maturities and Realized Realized
Purchases on Sales Redemptions Gains Losses
--------------------------------------------------------------------
1994:
Securities
available-for-sale:
Fixed maturities $16,651,037 $11,718,678 $2,203,636 $ 152,103 $ 293,309
Equities 34,367,822 22,148,307 - 1,306,050 321,454
------------ ------------ ---------- ---------- ---------
51,018,859 33,866,985 2,203,636 1,458,153 614,763
Fixed maturities
classified
as held-to-maturity 1,532,557 - 4,530,661 109,468 1,960
------------ ------------ ---------- ---------- ---------
$52,551,416 $33,866,985 $6,734,297 $1,567,621 $ 616,723
============ ============ ========== ========== =========
45
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 3--INVESTMENTS--Continued
Gross realized gains and losses on sales of investment securities during 1993
were as follows:
1993
------------
Realized gains net of losses on sales of investments:
Fixed maturities $ 1,193,631
Equity securities 920,781
------------
$ 2,114,412
============
For fixed maturities, there were no realized losses for 1993.
In December 1995, a One-Time Reassessment of the Classification of Securities
under FAS 115 was implemented, allowing an enterprise to reassess the
appropriateness of the classifications of all securities held at that time and
account for any resulting reclassification at fair value. This reclassification
must have been completed no later than December 31, 1995. In accordance with
this reclassification, on December 4, 1995, First Central Insurance transferred
$10,391,000 par value of held-to-maturity securities to the available-for-sale
category.
For the years ended December 31, 1995 and December 31, 1994 there were no
transfers of securities from the available-for-sale category into the trading
category, and except for the above mentioned, there were no securities
classified as held-to-maturity that were sold or transferred to
available-for-sale or trading categories.
NOTE 4--REINSURANCE
During 1993, First Central adopted FASB Statement No. 113, Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The
adoption of Statement 113 requires First Central to report estimated reinsurance
receivables arising from reinsurance contracts and amounts paid to the reinsurer
relating to the unexpired portion of reinsured contracts (prepaid reinsurance
premiums) separately as assets. Prior to the adoption of Statement 113,
estimated reinsurance receivables and prepaid reinsurance premiums were netted
against policy liabilities.
The assets for future policy benefits and losses, claims, and loss adjustment
expenses were $19,541,811 and $24,589,577 at December 31, 1995 and 1994,
respectively, for estimated recoveries under reinsurance treaties. Reinsurance
recoverable on unearned premium reserves were approximately $8,206,000 and
$1,974,000 at December 31, 1995, and 1994, respectively. As a result of the
actuarial study performed on the December 31, 1994 loss and loss adjustment
expense reserves, the ceded IBNR was increased $10,000,000. The effect of this
increase was offset by the additional direct IBNR of $13,900,000 .
Ceded reinsurance premiums were approximately $21,726,000, $10,163,000 and
$6,531,000 in 1995, 1994 and 1993, respectively. Ceded reinsurance premiums
earned were approximately $15,493,000, $9,454,000 and $6,281,000 for the years
ended 1995, 1994, and 1993, respectively. Reinsurance recoveries on loss and
loss adjustment expenses incurred were approximately $1,824,000, $21,067,000 and
$5,344,000 for 1995, 1994, and 1993, respectively.
46
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 4--REINSURANCE--Continued
Effective January 1, 1993, First Central Insurance continues to reinsure
business with limits up to
$1,000,000, its retention level is at $200,000. First Central Insurance also has
an excess agreement to reinsure worker's compensation coverage for a total of
$2,000,000 and automatic facultative arrangements to reinsure property for a
total of $4,500,000.
At December 31, 1995 and 1994, a loss contingency (after deducting funds
deposited by or due to such reinsurers) exists with respect to reinsurance
receivables and prepaid reinsurance premiums, part or all of which would become
an actual loss in the event any of the reinsuring companies are unable, at some
later date, to meet their obligations to First Central Insurance under the
existing reinsurance agreements.
At December 31, 1995 and 1994, under the terms of a reinsurance treaty, First
Central Insurance was holding escrow trust funds of $13,374 and $13,016
respectively, which are included in short-term investments and are to be used
for the payment of all applicable reinsured losses and loss adjustment expenses.
At December 31, 1995 and 1994 reinsurance payable totaling $1,393,663 and
$503,684, respectively, principally represents premiums due to reinsurance
companies in connection with the treaties described above.
During 1995 an endorsement to the reinsurance treaty changed the calculation of
reinsurance premiums. The result of this endorsement was a decrease in net
premiums written, a decrease in unearned premiums and a liability for funds held
for reinsurance treaty of $3,704,947 at December 31, 1995.
A contingent commission from Swiss Re, based on First Central Insurance's 1994
loss ratio with them, in the amount of $91,226 was received in February 1995.
For the year ended December 31, 1995 a contingent commission, in the amount of
$62,110, was due to First Central Insurance.
NOTE 5--POLICY ACQUISITION COSTS
The major components of policy acquisition costs charged to operations are
summarized as follows:
Years Ended December 31
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
Amortization of deferred acquisition costs $ 7,339,084 $ 6,451,030 $ 6,022,404
Other (Commissions, payroll fees, premium taxes, and
other costs directly related to production
of premiums--see 5,352,122 6,362,070 6,200,637
Note 7)
----------- ----------- -----------
$12,691,206 $12,813,100 $12,223,041
=========== =========== ===========
NOTE 6--INCOME TAXES
Effective January 1, 1993, First Central adopted FASB Statement No. 109
"Accounting for Income Taxes". The adoption of Statement 109 changes First
Central's method of accounting for income taxes from the
47
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 6--INCOME TAXES--Continued
deferred method to a liability method. Under the deferred method, First Central
deferred the past tax effects of timing differences between financial reporting
and taxable income. As explained in Note 2, the liability method requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the reported amounts of assets and
liabilities and their tax bases.
The adoption of Statement 109 did not have a significant effect on the January
1, 1993 balance sheet or on the results of operations for the year ended
December 31, 1993.
Income tax expense consists of the following components:
Years Ended December 31
-----------------------------------------------
1995 1994 1993
------------- ------------- ------------
Current:
U.S. federal $ 540,000 $ 2,862,500 $2,004,000
State and local 84,000 83,000 104,000
------------- ------------- ------------
624,000 2,945,500 2,108,000
Deferred, U.S. federal (1,580,000) (1,002,000) (658,000)
------------- ------------- ------------
$ (956,000) $ 1,943,500 $1,450,000
============= ============= ============
The tax effects of temporary differences that give rise to significant
components of the net deferred tax assets at December 31, are presented below:
Years Ended December 31
-----------------------------------------------
1995 1994 1993
------------- ------------- ------------
Deferred Tax Assets:
Loss reserve discounting $ 4,669,000 $ 3,489,000 $ 2,725,700
Net unrealized depreciation on securities
available-for-sale - 3,003,000 -
Unearned premium reserve 1,910,000 2,078,000 1,712,600
Allowance for bad debts 534,000 454,000 335,600
Other 2,000 - -
------------- ------------- ------------
Deferred Tax Assets 7,115,000 9,024,000 4,773,900
------------- ------------- ------------
Deferred Tax Liabilities:
Deferred policy acquisition costs 2,159,000 2,495,000 2,193,400
Net unrealized appreciation on securities
available-for-sale 392,000 - -
Salvage and subrogation receivable 99,000 60,000 55,300
Fixed assets - 12,000 12,900
Investment discount amortization - - 48,900
Other - 177,000 188,400
------------- ------------- ------------
Deferred Tax Liabilities 2,650,000 2,744,000 2,498,900
------------- ------------- ------------
Net Deferred Tax Assets $ 4,465,000 $ 6,280,000 $ 2,275,000
============= ============= ============
48
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 6--INCOME TAXES--Continued
The following table reconciles the federal statutory income tax rate to First
Central's effective income tax rate on income before income taxes:
1995 1994 1993
---------------- ----------------- -----------------
Amount % Amount % Amount %
---------------- ----------------- -----------------
Income tax computed at
statutory tax rate $(201,000) 34 2,604,000 34 $2,024,000 34
Add (deduct):
State tax, net of federal
benefit 55,000 (9) 55,000 1 69,000 1
Tax exempt interest (477,000) 81 (420,000) (6) (449,000) (8)
Dividend exclusion (363,000) 61 (459,000) (6) (305,000) (5)
Other 30,000 (5) 163,500 2 (111,000) 2
----------- --- ------------ ------ ------------ ---
INCOME TAXES $(956,000) 162 $1,943,500 25 $1,450,000 24
========= === ========== ==== ========== ===
NOTE 7--RELATED PARTY AND OTHER SIGNIFICANT TRANSACTIONS
During each of the years ended December 31, 1995 and 1994, approximately 12.7%
and 12.5% respectively, of all insurance written by First Central Insurance was
sold through Simon General Agency, Inc. ("Simon General") a licensed general
insurance agency, which also writes insurance for other unrelated insurance
companies, the stock of which is owned by Joan Dollinger and Audrey Goodman (the
respective wives of Joel Dollinger and Allan Goodman, Vice Presidents and
Directors of First Central) and Sheryl Harwood, who are Mr. Simon's three
daughters. At December 31, 1995 and 1994 the premiums receivable from Simon
General were approximately $3.3 million and $2.9 million respectively. Simon
General is paid commissions ranging from 15% to 22.5% on the different lines of
business produced. These commissions are comparable to those paid by First
Central Insurance to unrelated agents. In accordance with the general agents'
agreements with their subagents and brokers, approximately 75% of these
commissions are paid to the subagents and brokers. Prior to 1994, Simon
Commercial Corp. ("Simon Commercial"), a general insurance agency owned by the
President of First Central, also wrote business for First Central. A summary of
the transactions with Simon General and Simon Commercial is presented below:
49
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 7--RELATED PARTY AND OTHER SIGNIFICANT TRANSACTIONS--Continued
Years Ended December 31
------------------------------------------
1995 1994 1993
---------- ---------- ---------
Premiums written $9,202,000 $8,230,000 $8,212,000
========== ========== ==========
Commissions (policy acquisition costs) $1,805,000 $1,581,000 $1,409,000
========== ========== ==========
Claims settlement legal services are provided by several law firms.
The president and a director of First Central are partners in one of the firms;
fees paid to this firm for 1995, 1994, and 1993 were approximately $798,000,
$722,000, and $678,000 respectively. Another director is a partner in a law firm
providing claim services; fees paid to this firm for 1995, 1994 and 1993 were
$323,000, $341,000 and $189,000 respectively.
50
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 8--LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses is
summarized as follows:
1995 1994 1993
--------- ---------- ----------
(Dollars in Thousands)
Balance at January 1 $ 73,516 $ 44,806 $ 32,580
Less reinsurance recoverables 24,588 6,732 3,877
--------- ---------- ----------
Net Balance at January 1 48,928 38,074 28,703
--------- ---------- ----------
Incurred related to:
Current year 29,066 23,741 21,575
Prior years 12,995 5,883 4,199
--------- ---------- ----------
Total incurred 42,061 29,624 25,774
--------- ---------- ----------
Paid related to:
Current year 5,057 4,964 6,144
Prior years 18,837 13,806 10,259
--------- ---------- ----------
Total paid 23,894 18,770 16,403
--------- ---------- ----------
Net Balance at December 31 67,095 48,928 38,074
Plus reinsurance recoverables 19,541 24,589 6,732
--------- ---------- ----------
Balance at December 31 $ 86,636 $ 73,516 $ 44,806
========= ========== ==========
As a result of changes in estimates of insured events in prior years, the
provision for claims and claim adjustment expenses increased by $12,995, $5,883
and $4,199 in 1995, 1994 and 1993, respectively. This is a result of a
refinement of estimates for losses which occurred in prior years and an effort
to strengthen reserves.
In establishing the liability for unpaid claims and claim adjustment expenses
related to environmental claims management considers facts currently known and
the current state of the law and coverage litigation, liabilities are recognized
for known claims (including the cost of related litigation) when sufficient
information has been developed to indicate the involvement of a specific
insurance policy, and management can reasonably estimate its liability.
Estimates of the liabilities are reviewed and updated continually.
51
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 9--SHAREHOLDERS' EQUITY AND RESTRICTIONS
In June 1990, First Central's Board of Directors awarded a five-year warrant to
an investment advisor, to purchase 50,000 shares of First Central's Common Stock
at an exercise price of $6.97 per share. In conjunction with the issuance of
this warrant, 50,000 shares of First Central's Common Stock were reserved for
future issuance. This warrant expired in June of 1995.
In June 1990, First Central's shareholders approved a proposal authorizing First
Central to issue warrants to non-employee directors of First Central to purchase
an aggregate of not more than 250,000 shares of First Central's Common Stock.
The Board of Directors is to determine the terms and conditions of the warrants,
as well as the recipients, subject to the limitations that: (i) the exercise
price of the warrants is not to be less than the market value of First Central's
Common Stock at the date of Grant, (ii) the expiration date of the warrants is
not to be more than five years from the date of grant, and (iii) the maximum
number of shares of First Central's Common Stock issuable upon exercise of any
warrant is not to exceed 10,000 shares. On March 18, 1992, the Committee awarded
warrants to purchase up to an aggregate of 160,000 shares of Common Stock at an
exercise price of $5.6875 per share to the non-employee Directors of First
Central and First Central Insurance as a group. No warrants have been awarded
since 1992. 12,500 and 0 warrants were exercised in 1995 and 1994 respectively.
During 1992, in connection with the private placement of common stock to an
institutional investor, First Central issued a three year warrant to purchase
114,286 shares of common stock at an exercise price of $7.00 per share. In March
1993, in connection with another private placement of common stock to a second
institutional investor, First Central issued a two year warrant ("Series A
Warrant") to purchase 153,846 shares of common stock at an exercise price of
$7.00 per share, and a three year warrant ("Series B Warrant") at an exercise
price of $7.50 per share. In March 1993, the first placement was modified to
conform to the terms of the second placement which resulted in cancellation of
the warrant for 114,286 shares and issuance of one Series A Warrant and one
Series B Warrant for 123,077 shares of common stock each. In December, 1993, in
connection with a second private placement to the second institutional investor,
First Central issued one Series B Three-Year Warrant for 153,846 shares of
common stock. During 1994, in connection with private placements to two
institutional investors and a reinsurance company, First Central issued a two
year Series C common stock purchase warrant to each of these investors to
purchase a total of 192,307 shares of common stock at an exercisable price of
$7.50 per share. The Series A Warrant for 153,846 and 114,286 shares of common
stock expired in March of 1995.
In connection with the Series B Warrant, 430,769 shares of First Central's
common stock have been reserved for future issuance.
At December 31, 1995, approximately $23,715,735 of consolidated shareholders'
equity represents net assets of First Central Insurance that cannot be
transferred in the form of dividends, loans, or advanced to First Central
without prior approval from the New York State Insurance Department. Generally,
the net assets of First Central Insurance available for transfer to First
Central are limited to the amounts that its net assets exceed minimum statutory
requirements (approximately $2,635,000 at December 31, 1995), however, payments
of such amounts as dividends must be paid out of earned surplus (as defined),
are subject to statutory restriction, and may be subject to approval by the
insurance regulatory authorities.
52
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 10--STATUTORY-BASIS NET INCOME AND SHAREHOLDERS' EQUITY
The following is a reconciliation of the net income and shareholders' equity, as
determined in accordance with Statutory Accounting Principles, to the
corresponding GAAP amounts included in the accompanying financial statements:
Net Income
----------------------------------------------
Years Ended December 31
----------------------------------------------
1995 1994 1993
----------------------------------------------
Net Income of First Central
Insurance--Statutory basis, as reported $ 1,065,475 $ 4,681,606 $4,578,354
Statutory audit adjustments 686,000 - 377,000
------------- ------------- ------------
NET INCOME--STATUTORY BASIS, AS ADJUSTED 379,475 4,681,606 4,955,354
------------- ------------- ------------
Adjustments to convert from statutory basis
to GAAP
Change in deferred policy acquisition costs (987,108) 888,054 428,626
Deferred income taxes 1,580,000 1,002,000 658,000
Bad debt provision (232,138) (399,611) (93,894)
Decrease in salvage/subrogation
recoverable - - (858,000)
Write-down of investments (555,281) - -
------------- ------------- ------------
(194,527) 1,490,443 134,732
------------- ------------- ------------
Net income (loss) -- GAAP
First Central Insurance 870,948 6,172,049 5,090,086
First Central (779,989) (674,587) (829,844)
Mercury 269,594 218,683 241,647
------------- ------------- ------------
CONSOLIDATED NET INCOME--GAAP BASIS $ 360,553 $ 5,716,145 $4,501,889
============= ============= ============
53
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 10--STATUTORY-BASIS NET INCOME AND SHAREHOLDERS' EQUITY--Continued
Shareholders' Equity
--------------------------------
December 31
--------------------------------
1995 1994
--------------------------------
Shareholders' equity of First Central
Insurance--statutory basis as reported $26,350,816 $20,345,966
Statutory audit adjustments (686,000) -
------------- -------------
SHAREHOLDERS' EQUITY--STATUTORY BASIS, AS ADJUSTED 25,664,816 20,345,966
------------- -------------
Adjustments to convert from statutory basis to GAAP:
Add (deduct):
Deferral of policy acquisition costs 6,351,976 7,339,084
Restoration of nonadmitted assets 2,001,754 2,080,801
Deferred income tax assets 4,465,000 6,280,000
Allowance for doubtful accounts (1,554,074) (1,321,936)
Unrealized gain or (loss) on fixed maturities classified
as available-for-sale 458,540 (2,851,811)
Write-down of security 130,719 -
------------- -------------
11,853,915 11,526,138
------------- -------------
Shareholders' equity (deficit) -- GAAP
First Central Insurance 37,518,731 31,872,104
First Central 218,845 (164,560)
Mercury 650,033 580,439
Portion of convertible subordinated debenture proceeds
contributed to First Central Insurance (5,050,000) (5,050,000)
------------- -------------
CONSOLIDATED SHAREHOLDERS' EQUITY--GAAP BASIS $33,337,609 $27,237,983
============= =============
54
FIRST CENTRAL FINANCIAL CORPORATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 11--PRINCIPAL LINES OF BUSINESS
First Central Insurance offers various types of property and casualty insurance
to its policyholders. The risks are geographically located principally in the
State of New York. Revenues and earnings from operations, by principal line of
business, are as follows:
Commercial Automobile
Multiple Workers' General Automobile Physical
Peril Compensation Liability Liability Damage Other Total
---------- ------------ --------- ----------- ---------- ----- -------
1995:
Earned premium and other revenues $29,854,226 $8,180,270 $15,395,998 $5,071,389 $1,305,534 $645,166 $60,452,583
Loss from operations before
income taxes (294,059) (80,574) (151,648) (49,952) (12,859) (6,355) (595,447)
1994:
Earned premium and other revenues $26,802,088 $9,599,684 $12,654,761 $5,048,164 $1,701,861 $458,167 $56,264,725
Income from operations before
income taxes 3,648,724 1,306,861 1,722,766 687,236 231,684 62,374 7,659,645
1993:
Earned premium and other revenues $24,649,068 $8,998,840 $ 7,492,601 $5,697,851 $2,244,945 $364,155 $49,447,460
Income from operations before
income taxes 2,966,958 1,083,172 901,869 685,839 270,219 43,832 5,951,889
In determining other revenues and income from operations before income taxes,
certain significant items not directly associated with a line of business are
allocated. Net investment income including realized gains and losses are
allocated to lines of business on the basis of a formula. Claims Adjusting
Reserves are also allocated on the basis of the same formula. Certain operating
expenses are allocated on the basis of premiums written. Assets are generally
not identifiable as to line of business. Periodically, the methods and
allocation formulas are revised to more closely approximate the results of each
principal line of business.
NOTE 12--CONVERTIBLE SUBORDINATED DEBENTURES
In 1988, First Central privately placed $10,300,000 of its convertible
subordinated debentures and, in conjunction therewith, received net proceeds of
approximately $9,111,000, of which $5,050,000 was contributed by First Central
to the capital of First Central Insurance. In 1989, an additional $1,950,000 of
convertible subordinated debentures were issued and net proceeds of
approximately $1,600,000 were received by First Central.
The debentures were issued pursuant to a trust indenture, dated September 1,
1988, between First Central and United States Trust Company, as trustee. The
debentures bear annual interest of 9%, payable semiannually, commencing February
1, 1989. In each of the years ended 1995, 1994 and 1993, interest paid amounted
to approximately $603,000, $677,000 and $862,000, respectively.
55
FIRST CENTRAL FINANCIAL CORPORATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 12--CONVERTIBLE SUBORDINATED DEBENTURES--Continued
The debentures are convertible at any time prior to maturity, unless previously
redeemed, into shares of First Central's Common Stock at a conversion price of
$6.50 per share prior to August 1, 1991, and at $7.50 per share thereafter and
prior to August 1, 2000, subject to adjustment under certain conditions. Prior
to August 1, 1991, $385,000 of the debentures were converted into 59,228 shares
of First Central's Common Stock. At December 31, 1995, 844,000 shares of First
Central's Common Stock remain reserved for future issuance upon conversion. The
debentures are redeemable, at any time, at the option of First Central.
Commencing August 1, 1993, mandatory annual sinking fund payments of 15% of the
original principal amount plus accrued interest to maturity must be made to
retire at least 75% of the debentures prior to maturity. Through August 1, 1997,
the annual principal amount payable to the Trustee is $1,837,500. First Central
may credit other redemptions of the debentures against the sinking fund
requirements. As of December 31, 1995, First Central has satisfied its
requirements through other redemptions of approximately $5,535,000 in principal
and $385,000 in conversions. The debentures are subordinated to all existing and
future senior indebtedness of First Central (none was outstanding at December
31, 1995 and 1994), as provided in the indenture.
NOTE 13--BUILDING PURCHASE AND OPERATING LEASES
On January 17, 1995, First Central Insurance purchased its home office building,
located at 266 Merrick Road, Lynbrook, New York, (the "Building") for $4,000,000
in cash. The Building consists of approximately 30,000 square feet of office
space and 2,000 square feet of retail space. The approval to acquire real estate
required by the State of New York Insurance Department was obtained on December
27, 1994. The Company has assumed the leases of the tenants of the Building.
Management believes that the Building is suitable for First Central's purposes
for the foreseeable future.
Approximately 9,600 square feet of office and retail space is leased to eight
unaffiliated tenants who have paid $204,690 in rent during 1995.
First Central Insurance subleased 3,900 square feet of its leased office space
to Simon General under a sublease agreement that expired November 30, 1995.
During 1995, Simon General paid $88,323 to First Central Insurance. Effective
December 1, 1995 Simon General entered into a lease for 3,900 square feet, which
provides for an annul rent of $78,000. Simon General's rent under the lease is
comparable to that paid by other tenants who occupy the building.
NOTE 14--STOCK OPTIONS
During 1990, First Central adopted the 1990 Stock Incentive Plan ("Plan"). The
plan expired by its terms during 1995. The plan provided for up to 250,000
shares of First Central's common stock to be awarded and issued and/or for the
award of options or stock appreciation rights. In 1992, options to purchase
125,000 shares of common stock at an exercise price of $5.6875 per share were
awarded under the plan. The options are exercisable with respect to 25% of the
shares covered by such options each year commencing in 1994 and expire in March
1997. During 1995 options to purchase 12,500 shares of common stock were
exercised. During 1994, options to purchase 5,000 shares of common stock were
cancelled and no options exercised. No common stock or stock appreciation rights
were issued under the plan.
56
FIRST CENTRAL FINANCIAL CORPORATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 14--STOCK OPTIONS--Continued
In September 1993 First Central issued to its President and Chief Executive
Officer an option to purchase up to 50,000 shares of common stock at an exercise
price of $5.31 per share. Such option is exercisable with respect to 25% of the
shares covered by the option each year commencing in 1994 and expires in 1998.
No options were exercised in 1995 or 1994.
NOTE 15--PROFIT SHARING AND 401(k) PLANS
Profit Sharing Plan: The Company has a profit-sharing plan for those employees
who meet the eligibility requirements set forth in the plan. The plan covers
substantially all of the Company's full-time employees. The amount of the annual
expense attributable to the plan is at the discretion of the Company's Board of
Directors. The Company expensed $62,800, $90,000 and $75,000 to the plan for the
years ended December 31, 1995, 1994 and 1993, respectively.
401(k) Plan: In 1993, the Company established a defined contribution 401(k) plan
for its employees which generally allows participants who meet the eligibility
requirements set forth in the plan to make contributions by salary deductions up
to allowable IRS limits on a tax-deferred basis. The Company does not make or
match contributions to the plan.
NOTE 16--COMMITMENTS AND CONTINGENCIES
During 1994, employment agreements were entered into with seven executives of
the Company. The agreements are for terms ranging from three to six years and
provide for a base salary which is specified in each of the agreements and
benefit payments in the event of death or disability during the term of the
agreement. The minimum annual commitments under the agreements are 1996 -
$950,006; 1997 - $451,926; 1998 - $190,000; and 1999 - $190,000.
At December 31, 1994, computer equipment with an amortized cost of $423,110, was
acquired under a capital lease which transfers ownership at the end of the lease
term. As of December 31, 1995, the commitment under the lease has been
satisfied.
NOTE 17--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, short-term investments, balances due on account from
agents, reinsurers and others, and accounts payable approximate their carrying
amounts as reflected in the consolidated balance sheets due to their short-term
availability or maturity. Assets and liabilities related to the Company's
separate accounts are reported at fair value in the accompanying consolidated
balance sheets.
The fair values of debt and equity securities have been determined from
nationally quoted market prices and by using values supplied by independent
pricing services. These fair values are disclosed together with carrying amounts
in Note 3.
The fair value of the Company's convertible debentures approximate its stated
amount of $6,330,000 based on current interest rates and the Company's common
stock price.
57
FIRST CENTRAL FINANCIAL CORPORATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE 18--EMERGING ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" was issued. This statement is required to be adopted by the Company for its
fiscal year beginning January 1, 1996. This statement provides broad criteria
for determining when assets should be considered potentially impaired and
provides guidance as to the measurement methods of recording the amount of loss
to be recognized for impaired assets. Although management has not completed its
assessment of the impact of this statement, management does not expect the
impact of this statement to be material to the Company's financial position or
results of operations.
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation". This statement addressed the accounting for the cost of
stock-based compensation, such as stock options. FAS No. 123 permits either
expensing the cost of stock-based compensation over the vesting period or
disclosing in the financial statement footnotes what this expense would have
been. This cost would be measured at the grant date based upon estimated fair
values, using option pricing models. The Company expects to adopt the disclosure
alternative of this statement in 1996.
58
FIRST CENTRAL FINANCIAL CORPORATION
SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for 1995 and
1994:
1995 1994
------------------------------------ ------------------------------
(Dollars in Thousands, except share data)
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
Net premiums written $14,569 $10,824 $12,451 $12,724 $ 14,674 $15,726 $10,601 $14,429
Net premiums earned 12,824 13,338 13,851 13,021 12,413 12,095 12,466 13,085
Net investment
income and realized
gains 1,431 1,671 1,606 1,297 1,609 1,495 1,287 1,344
Claims adjusting
revenues 149 155 166 184 165 126 111 67
Rental income 129 158 (133) 50 - - - -
Total revenues 14,533 15,322 15,490 14,552 14,187 13,716 13,864 14,496
Total expenses 12,692 12,879 13,373 21,549 12,408 11,716 11,497 12,984
Net income (loss) $ 1,473 $ 1,812 $ 1,519 $(4,443) $ 1,241 $ 1,631 $ 1,482 $ 1,362
Net income (loss) per
common share:
Primary:
Net Income (loss) $0.25 $0.30 $0.25 $(0.74) $0.22 $0.28 $0.25 $0.22
Fully diluted:
Net Income (loss) $0.23 $0.27 $0.24 $(0.68) $0.20 $0.26 $0.23 $0.21
Primary net income per common share is based on the weighted average number of
shares of Common Stock and common stock equivalents (warrants and options)
outstanding during each period. Fully diluted net income per common share
assumes the conversion of the convertible subordinated debentures, common stock
equivalents (warrants and options), outstanding during each period if
applicable.
59
INDEPENDENT AUDITOR'S REPORT
ON THE SUPPLEMENTARY SCHEDULES
To the Board of Directors and Shareholders
First Central Financial Corporation
Lynbrook, New York
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplementary schedules I, II, III, IV, V and VI are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not a part
of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in our audits of the basic
consolidated financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
McGladrey & Pullen, LLP
New Haven, Connecticut
March 6, 1996
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
Schedule I - Summary of investments Other Than Investments in Related Parties.
December 31, 1995
Column A Column B Column C Column D
- ---------------------------------------------------------------------------------------------------------------
Amount at
Which Shown
in Balance
TYPE OF INVESTMENT COST VALUE Sheet
- -----------------------------------------------------------------------------------------------------------------
Fixed maturities securities, available-for-sale:
Bonds:
United States Government and government
agencies & authorities $ 10,184,178 $ 10,373,981 $ 10,373,981
States, municipalities, and political
subdivisions 17,572,941 17,868,343 17,868,343
Mortgage backed securities 3,075,406 3,104,889 3,104,889
All other corporate bonds 4,348,954 4,292,806 4,292,806
-------------------------------------------------------------
Total 35,181,479 35,640,019 35,640,019
-------------------------------------------------------------
Equity securities,
available-for-sale:
Common Stocks:
Public utilities 1,190,607 1,353,250 1,353,250
Bank, trust, and insurance companies 1,513,607 1,737,756 1,737,756
Industrial, miscellaneous, and all other 18,404,296 18,980,440 18,980,440
Nonredeemable preferred stocks 6,902,768 6,633,100 6,633,100
-------------------------------------------------------------
Total 28,011,278 28,704,546 28,704,546
-------------------------------------------------------------
Fixed maturity securities, held-to-maturity:
Bonds:
United States Government and
government agencies and authorities 20,191,262 20,251,878 20,191,262
States, municipalities, and
political subdivisions 12,528,495 12,763,709 12,528,495
Foreign governments 696,000 678,250 696,000
-------------------------------------------------------------
Total 33,415,757 33,693,837 33,415,757
-------------------------------------------------------------
Short-term Investments 2,918,369 2,918,369 2,918,369
-------------------------------------------------------------
Total investments $ 99,526,883 $ 100,956,771 $100,678,691
=============================================================
60
FIRST CENTRAL FINANCIAL CORPORATION
(Parent Company)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31
---------------------------------------
1995 1994
-------------- -------------
ASSETS
Cash $ 8,708 $ 8,374
Securities available-for-sale at market value:
Equity securities (cost; 1995 - $352,000) 166,000 -
Short term investments, at cost 612,826 534,497
Investment in subsidiaries, at equity 38,474,024 32,767,127
Due from subsidiary 292,573 192,240
Deferred debenture costs 438,603 541,696
Equipment less accumulated depreciation
(1995 - $1,080,988; 1994 - $1,169,000) 5,204 393,048
Other assets 98,733 98,384
---------------------------------------
$40,096,671 $34,535,366
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligation under capital lease $ - $ 84,744
Convertible subordinated debentures 6,330,000 6,755,000
Other liabilities 429,062 457,639
---------------------------------------
6,759,062 7,297,383
---------------------------------------
Shareholders' equity:
Common Stock - par value $.10 per share;
authorized shares; issued (1995 - 6,589,012
shares; 1994 - 6,576,512 658,902 657,652
Additional paid in capital 13,209,395 13,139,551
Net unrealized appreciation (depreciation)
on securities available
for sale, net of deferred taxes 759,806 (5,829,873)
Retained earnings 22,826,898 23,189,795
---------------------------------------
37,455,001 31,157,125
Less treasury stock, at cost
(1995 - 600,404 shares, 1994 - 572,404 shares) (4,117,392) (3,919,142)
---------------------------------------
33,337,609 27,237,983
---------------------------------------
$40,096,671 $34,535,366
=======================================
See Note to Condensed Financial Statements
61
FIRST CENTRAL FINANCIAL CORPORATION
(Parent Company)
SCHEDULE II CONTINUED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Years Ended December 31
------------------------------------------------------
1995 1994 1993
--------------- ---------------- ----------------
REVENUES
Cash dividend from subsidiaries $ 2,200,000 $ 1,565,000 $ 1,833,000
Investment (loss) income (34,823) 14,684 7,103
Equipment rental income from subsidiary 84,744 159,681 147,443
-----------------------------------------------------------
TOTAL REVENUES 2,249,921 1,739,365 1,987,546
-----------------------------------------------------------
EXPENSES
Interest expense 594,763 636,975 787,135
Operating expenses--net 614,654 542,977 623,255
-----------------------------------------------------------
TOTAL EXPENSES 1,209,417 1,179,952 1,410,390
-----------------------------------------------------------
Income before intercompany tax
allocation and
equity in undistributed net
income of subsidiaries 1,040,504 559,413 577,156
Intercompany tax credit 379,507 331,000 426,000
-----------------------------------------------------------
Income before equity in
undistributed net income of
net income of subsidiaries 1,420,011 890,413 1,003,156
Equity in undistributed net
(loss) income of subsidiaries 1,059,458 4,825,732 3,498,733
-----------------------------------------------------------
NET INCOME $ 360,553 $ 5,716,145 $ 4,501,889
===========================================================
See Note to Condensed Financial Statements
62
FIRST CENTRAL FINANCIAL CORPORATION
(Parent Company)
SCHEDULE II--Continued
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Years Ended December 31
--------------------------------------------------
1995 1994 1993
-------------- --------------- --------------
OPERATING ACTIVITIES
Net income $ 360,553 $ 5,716,145 $ 4,501,889
Adjustments to reconcile net income
to net cash provided by operating activities:
Undistributed net loss (income) of subsidiaries (net
of dividends from subsidiaries of $2,200,000 in
1995; $1,565,000 in 1994; and $1,833,000 in 1993) 1,059,458 (4,825,732) (3,498,733)
Provisions for depreciation and amortization 502,700 432,445 542,552
Net realized investment loss 45,000 - -
(Increase) decrease in due from subsidiaries (100,333) (126,781) 484,186
Changes in other assets and other liabilities (31,365) (83,247) (26,557)
Other - 56,000 -
-------------------------------------------------------
NET CASH PROVIDED BY OPERATING 1,836,013 1,168,830 2,003,337
ACTIVITIES
-------------------------------------------------------
INVESTING ACTIVITIES
Purchases of equity securities (397,000) - -
Net (purchases) sales of short-term investments (78,329) 481,613 (935,030)
-------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (475,329) 481,613 (935,030)
-------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on convertible subordinated debenture (425,000) (1,060,000) (2,000,000)
Principal payments on capital lease obligations (84,744) (159,681) (147,443)
Cash dividends paid (723,450) (635,174) (568,220)
Proceeds from issuance of shares of common stock - (920,000) -
Purchases of shares of common stock for treasury 71,094 1,169,995 1,781,999
Cash contributed to insurance subsidiary (198,250) (39,223) (134,697)
-------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (1,360,350) (1,644,083) (1,068,361)
-------------------------------------------------------
INCREASE (DECREASE) IN CASH 334 6,360 (54)
CASH AT BEGINNING OF YEAR 8,374 2,014 2,068
-------------------------------------------------------
CASH AT END OF YEAR $ 8,708 $ 8,374 $ 2,014
=======================================================
See Note to Condensed Financial Statements
63
FIRST CENTRAL FINANCIAL CORPORATION
(Parent Company)
SCHEDULE II-Continued
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and the related notes thereto of
First Central Financial Corporation and Subsidiaries.
64
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31
----------------------------------------------------
RESERVES FOR OTHER
DEFERRED UNPAID CLAIMS CLAIMS
POLICY AND LOSS AND
ACQUISITION ADJUSTMENT UNEARNED BENEFITS
COSTS EXPENSES PREMIUMS PAYABLE
----------- ------------- ----------- --------
1995:
Commercial multiple peril $3,480,511 $40,250,608 $19,887,898 $--
Workers' Compensation 759,233 16,469,019 4,338,316 --
General liability 1,338,871 22,219,793 7,650,409 --
Automobile liability 549,904 7,211,450 3,142,192 --
Automobile physical damage 156 671 87,069 895,231 --
Other 66,786 398,542 381,615 --
----------- ------------- ----------- ----
$6,351,976 $86,636,481 $36,295,661 $--
----------- ------------- ----------- ----
----------- ------------- ----------- ----
1994:
Commercial multiple peril $4,068,600 $34,711,740 $18,033,472 $--
Workers' Compensation 934,097 13,943,931 4,140,247 --
General liability 1,363,878 17,898,339 6,045,188 --
Automobile liability 657,171 6,318,412 2,912,816 --
Automobile physical damage 237,047 145,713 1,050,675 --
Other 78,291 498,284 347,017 --
---------- ------------- ----------- ----
$7,339,084 $73,516,419 $32,529,415 $--
---------- ------------- ----------- ----
---------- ------------- ----------- ----
1993:
Commercial multiple peril $3,299,280 $14,912,343 $14,028,177 $--
Workers' Compensation 1,010,623 11,453,859 3,945,608 --
General liability 1,096,519 10,803,276 4,294,336 --
Automobile liability 706,013 6,484,103 2,756,416 --
Automobile physical damage 286,217 349,383 1,203,453 --
Other 52,378 802,993 222,838 --
---------- ------------- ----------- ----
$6,451,030 $44,805,957 $26,450,828 $--
---------- ------------- ----------- ----
---------- ------------- ----------- ----
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
BENEFITS AMORTIZATION
CLAIMS OF DEFERRED
NET LOSSES AND POLICY OTHER NET
PREMIUM INVESTMENT SETTLEMENT ACQUISITIONS OPERATING PREMIUMS
REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
----------- ---------- ----------- ------------- ---------- -----------
1995:
Commercial multiple peril $26,869,904 $2,422,190 $22,666,218 $ 4,068,600 $2,248,633 $24,972,635
Workers' Compensation 7,298,994 663,697 4,403,050 934,097 610,823 6,842,680
General liability 12,469,204 1,249,138 9,462,259 1,363,878 1,043,497 12,878,535
Automobile liability 4,486,743 411,462 4,607,670 657,171 375,477 4,242,145
Automobile physical damage 1,354,661 105,923 732,518 237,047 113,366 1,092,060
Other 554,437 52,345 189,550 78,291 46,400 539,676
---------- ---------- ----------- ------------- ---------- -----------
$53,033,943 $4,904,755 $42,061,265 $ 7,339 084 $4,438,196 $50,567,731
----------- ---------- ----------- ------------- ---------- -----------
----------- ---------- ----------- ------------- ---------- -----------
1994:
Commercial multiple peril $23,023,758 $2,278,830 $13,170,288 $ 3,299,280 $2,055,728 $26,404,675
Workers' Compensation 9,262,704 816,207 4,143,022 1,010,623 827,041 9,457,343
General liability 10,732,899 1,075,963 6,577,404 1,096,519 958,311 12,467,120
Automobile liability 4,837,692 429,217 4,682,543 706,013 431,944 4,973,311
Automobile physical damage 1,857,186 144,700 1,092,327 286,217 165,823 1,676 626
Other 346,488 38,955 (41,641) 52,378 30,937 451,374
----------- ---------- ----------- ------------- ---------- -----------
$50,060,727 $4,783,872 $29,623,943 $ 6,451,030 $4,469,784 $55,430,449
----------- ---------- ----------- ------------- ---------- -----------
----------- ---------- ----------- ------------- ---------- -----------
1993:
Commercial multiple peril $21,201,693 $1,983,308 $9,290,404 $ 3,053,998 $2,044,710 $23,176,040
Workers' Compensation 8,273,431 724,062 5,641,950 1,052,294 797,897 8,461,068
General liability 5,726,864 602,868 3,264,441 829,684 552,304 7,044,843
Automobile liability 5,114,134 458,459 5,521,276 703,726 493,212 5,357,347
Automobile physical damage 2,121,970 180,632 1,554,142 316,031 204,645 2,110,787
Other 376,002 29,301 501,869 66,671 36,262 342,394
----------- ---------- ----------- ------------- ---------- -----------
$42,814,094 $3,978,630 $25,774,082 $ 6,022,404 $4,129,030 $46,492,479
----------- ---------- ----------- ------------- ---------- -----------
----------- ---------- ----------- ------------- ---------- -----------
65
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------- -------- --------- --------- --------- ----------------
Ceded to Assumed Percentage
Gross other From Other of Amount
Amount Companies Companies Net Amount Assumed to Net
------- --------- ---------- ---------- ---------------
Year ended December 31, 1995:
Property and liability insurance premiums $72,293,513 $21,725,782 $ -- $50,567,731 --
=========== ========== =========== =========== ===========
Year ended December 31, 1994:
Property and liability insurance premiums $65,592,939 $10,162,490 -- $55,430,449 --
=========== =========== =========== =========== ===========
Year ended December 31, 1993:
Property and liability insurance premiums $53,023,533 $6,531,054 -- $46,492,479 --
=========== =========== =========== =========== ===========
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------- ------------ -------------------------------- -------------------- ------------
ADDITIONS
-------------------------------
Balance at Charged to Balance
Beginning Costs and Charged to Other at End
of Period Expenses Accounts--Describe Deductions--Describe of Period
----------- ---------------------------------- --------------------- -------------
Allowance for doubtful accounts--
Premiums receivable and agents'
balances:
1995 $1,322,000 $232,000 $ $1,554,000
========== =================================== ==================== =============
1994 $987,000 $335,000 - $1,322,000
========== =================================== ==================== =============
1993 $1,017,000 $ - $ 30,000 Write Off $987,000
========== =================================== ==================== =============
66
FIRST CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
Years Ended December 31
-------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
------------ ------------ ------------------ ----------- ------------ -------------
Net Reserves for Discount
Deferred Unpaid Claims if any
Affiliation Policy and Claims Deducted Net
With Acquisitions Adjustment in Net Unearned Premiums
Registrant Costs Expenses Column C Premiums Earned
- ----------------- -------------- -------------- ----------- --------------- -------------
1995 Consolidated $6,351,976 $67,094,670 -- $28,089,206 $53,033,943
1994 Consolidated 7,339,084 48,926,842 -- 30,555,418 50,060,727
1993 Consolidated 6,451,030 38,073,603 -- 25,185,698 42,814,095
Years Ended December 31
--------------------------------------------------------------------------------------------------------
Column A Cont... Column G Column H Column I Column J Column K
- ---------------- ------------ ---------------------------------- ------------ ------------ ------------
Claims and Claim
Adjustment Expenses
Incurred Related to Amortization
----------------------- of Deferred Paid Claims
Affiliation Net Policy and Claim Net
with Investment (1) (2) Acquisition Adjustment Premiums
Registrant Income Current Year Prior Years Costs Expenses Written
- ----------------- ----------- ----------- ------------ ---------- ----------- -----------
1995 Consolidated $4,904,755 $29,066,000 $12,995,000 $7,339,084 $23,894,000 $50,567,731
1994 Consolidated 4,783,872 23,741,000 5,883,000 6,451,030 18,770,000 55,430,449
1993 Consolidated 3,978,630 21,575,000 4,199,000 6,022,404 16,403,000 46,492,479
67